Competition and Regulation in Shipping and

Shipping Related Industries

Competition and Regulation
in Shipping and
Shipping Related Industries

Edited by

Antonis Antapassis
Lia I. Athanassiou
Erik Røsæg

LEIDEN • BOSTON
2009
This book is printed on acid-free paper.

Library of Congress Cataloging-in-Publication Data

Competition and regulation in shipping and shipping related industries / Edited by Antonis
Antapassis, Lia Athanassiou, Erik Rosaeg.
p. cm.
Includes index.
ISBN 978-90-04-17395-8 (hardback : alk. paper) 1. Maritime law--European Union
countries. 2. Competition, Unfair--European Union countries. 3. Restraint of trade--
European Union countries. 4. Antitrust law--European Union countries. 5. Foreign
trade regulation--European Union countries. 6. Maritime law. 7. Foreign trade
regulation. 8. Competition, Unfair. I. Antapases, Antonios M. II. Athanassiou, Lia.
III. Røsæg, Erik.
KJE2260.5.C66 2009
343.24'0721--dc22
2009011298

ISBN 978 90 04 17395 8

Copyright 2009 by Koninklijke Brill NV, Leiden, The Netherlands.

Koninklijke Brill NV incorporates the imprints Brill, Hotei Publishing,
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printed in the netherlands

 CONTENTS

Preface....................................................................................................... ix
Acknowledgements.................................................................................... xi

EC Law and Maritime Transport: Preliminary Remarks ............................. 1

Fotis Karamitsos

PART I
COMPETITION IN SHIPPING

Liner Shipping, Antitrust and the Repeal of Regulation 4056/86:

A New Era of Global Maritime Confrontation?.......................................... 7
Francesco Munari

Information Exchange Agreements between Liner Shipping

Companies under EC Competition Law .................................................. 26
Alla Pozdnakova

E.U. and U.S. Competition Laws Compared: The Paradigm of

Horizontal Co-operation in Maritime Trade ............................................. 43
Emmanuel P. Mastromanolis

Competition in Liner and Tramp Maritime Transport Services:

Uniform Regulation, Divergent Application? ........................................... 70
Lia I. Athanassiou

Setting Sail on a Sea of Doubt: Tramp Shipping Pools,

Competition Law and the Noble Quest for Certainty .............................. 94
F.ilippo Lorenzon and Renato Nazzini

Cooperate or Merge? Structural Changes and Full-Function

Joint Ventures in the Shipping Industry ................................................. 117
Olav Kolstad
vi contents

PART II
COMPETITION IN THE PORT SECTOR AND
IN SPECIFIC MARKETS

The Application of EC Competition Rules to the Port Sector ................. 139

Lenita Lindström-Rossi

Public Interest versus Freedom of Competition in Sea Ports’

Privatizations: The Case of Greece .......................................................... 153
George Gerapetritis

The Application of the EC Common Rules on Competition to

Cabotage, including Island Cabotage ..................................................... 167
Rosa Greaves

Competition and Public Service in Greek Cabotage ............................... 185

Alexandra P. Mikroulea

A Maritime Competition Reading of Regulation 1408/71/EC

on the Co-ordination of Social Security Systems in the European
Union: Is the Current Regime Out-of-Date? .......................................... 207
Iliana Christodoulou-Varotsi

PART III
COMPETITION DISTORTING FACTORS

Fiscal Aid for Maritime Transport........................................................... 225

Phedon Nicolaides

Public Financing in the Port Sector and State Aid Rules ......................... 242
Nikolaos E. Farantouris

Tonnage Tax and Tax Competition ......................................................... 265

Georgios Matsos

Marine Insurance Regimes and their Impact on

Shipping Competition............................................................................ 290
Trine-Lise Wilhelmsen
 contents vii

Protection & Indemnity Clubs and Competition ................................... 317

Dimitrios Christodoulou

Advantages and Disadvantages of the Parallel Flags in an

International Shipping Context .............................................................. 337
Xosé Manuel Carril-Vázquez

PART IV
FREEDOM OF CONTRACT VERSUS REGULATION

UNCITRAL (Draft) Convention on Contracts for the

International Carriage of Goods Wholly or Partly by Sea:
Mandatory Rules and Freedom of Contract............................................ 349
Regina Asariotis

The Liability of the Sea Carrier in the UNCITRAL

Convention on Contracts for the International Carriage
of Goods Wholly or Partly by Sea ........................................................... 366
Philippe Delebecque

Freedom of Contract and Public Order Relative to the Legal

Effect of the Hague-Visby Rules: Prospects of English Law
and of French Law.................................................................................. 375
Yves Tassel

Issues Arising from the Limitation of Liability in the

Maritime Transport of Passengers ........................................................... 385
Eleni Gologina-Economou

Index ...................................................................................................... 399

 PREFACE

In Europe, there are around 30 research institutes devoted to maritime law,1

and much quality research in the field in Europe is carried out in and outside
of these institutions. The European Colloquiums of Maritime Law Research
(ECMLR) serve as a meeting place for all these researchers. It is a pleasure to
see that the exchange of ideas in these colloquiums have promoted better
research and a sense of European identity also in legal research in Europe.
The major part of the presentations at the fifth ECMLR concerned differ-
ent aspects of European Competition Law. There are few pieces of legislation
that have shaken the industry as much as the recent extension of the general
European competition law regime to the maritime sector. The impact is more
a matter of uncertainty than of change. This is what legal research is for: to
create structure and clarity. But it is also in the power of legislators to create
open-ended legislation. Then it is for the community of maritime law research-
ers to demonstrate just how open-ended it is.
This year’s focus on competition law also signifies a shift in the focus of
commercial maritime lawyers away from contract law and other classic private
law disciplines. There is certainly still a need for private law analysis, clearly
demonstrated by the discussions on freedom of contract in this year’s collo-
quium. But the scope of maritime law must be broadened to reflect the com-
mercial and legislative reality. New topics that need to be included, apart from
competition law, are safety regulation and other public law issues, labor law,
company law, tax law, public and private international law and last, but not
least, jurisdictional issues.
This contemporary complexity and interaction is reflected in the structure
of this volume. Although a traditional competition law approach would have
been limited to a sector-specific study of the enforcement of the competition
rules, a more original approach is adopted here, focusing on maritime compe-
tition in its widest sense as an economic phenomenon. Four chapters high-
light the issue from four different points of view. The first deals with
competition issues in international maritime services and the problems arising
from the repeal of the EC Regulation 4056/1986 by Regulation 1419/2006.
Emphasis is put on the new approach towards horizontal agreements between
liner operators and the legal treatment of the bulk sector, excluded so far from

1
See http://folk.uio.no/erikro/WWW/ecmlr/ecmlr.htm.
x preface

the application of the EC antitrust rules. The second part deals with competi-
tion and freedom to provide services in specific shipping and shipping related
markets. The third part focuses on competition-distorting factors emanating
from the regulatory activity of States or from the operation of other economic
sectors relating to shipping. Finally, the last chapter shifts from the operation
of the market as a whole to the operation of the individual shipping entrepre-
neur, by placing emphasis on the dialectic relationship between mandatory
international rules and the freedom of contracts.
Maritime law, although being in the process of a broadening transition, will
still keep its focus: a discussion on matters relating to ships. The strength of
this methodological approach remains. It will still be very useful, interesting
and challenging to study how different aspects of law interact in connection
with these fascinating moving objects.
The fact that the scope of maritime law is broadening, also leaves less room
for maritime particularism. The legal regime applicable to ships will be a part
of the general regime – or several general regimes. And there will be no room
for rules particularly affecting ships if there is no compelling need for such
particularisms, and even then it may be difficult enough to maintain them.
We have seen that this is so in the field of competition law. In the future we
will most likely see a similar development in, e.g. the law of torts, contracts
and jurisdiction.
Maritime law research is and will be more important than ever before.

Erik Røsæ g, Lia I. Athanassiou and Antonis Antapassis

 ACKNOWLEDGEMENTS

In economic life as well as in scientific research, some forms of cooperation are

deemed to favour development and to produce benefits for “users”, practition-
ers and academics. The cooperation of the Faculty of Law, University of
Athens, the Hellenic Maritime Law Association and the Scandinavian Institute
of Maritime Law is an example of such beneficial agreement. In this frame-
work, twenty-three authors representing international institutions and nota-
ble European universities have agreed to contribute their experience and
research, from a multidisciplinary point of view, to this volume. We thank all
of them.
Our thanks go also to the sponsors, who made this gathering possible
by their generous assistance, namely the Union of Greek Shipowners, Alapis
AEBE, the National Bank of Greece, Naftomar, Nomiki Vivliothiki, Eastern
Mediterranean Maritime Ltd, the Maria Tsakos Foundation, Hager Hellas, the
Epirotiki Group and Otesat-Maritel.
Finally, we wish to express our gratitude to the publishers, Brill, and, in
particular, to Peter Buschman for having kindly agreed to give birth to this
book.
EC LAW AND MARITIME TRANSPORT: PRELIMINARY REMARKS

Fotis Karamitsos*

I. Introduction
II. Shipping Conferences
III. Maritime Safety
IV. Ports Policy

I. Introduction

In the last few years, the EU has become a major player in the maritime regu-
latory environment. Those who are familiar with the Brussels “machinery”
will agree that legislation in all areas is growing day by day, and increasing
Europe’s impact and influence on the international scene.
As a matter of fact, the EU is more and more actively involved with a wide
range of topics namely: maritime safety and maritime security, and the protec-
tion of the environment, but also the human element and its role in maritime
activities, cabotage regulations, liberalisation rules, research and financing,
market access to maritime services and maritime external relations and, last
but not least, as it is the main theme for today’s colloquium, competition.
However, from a Community perspective the maritime sector is quite dif-
ferent from others. For all modes of transport – and more generally for all
economic activities – the very first objective of Community law has been the
creation of the internal market, which is an obvious objective, given the pri-
mary nature of the European Community. But the task has not been the same
for all modes of transport. Unlike air or rail, maritime transport had a long
tradition of freedom well before the creation of the Community. Therefore,
Europe’s tasks in the creation of the internal market have been simpler, per-
haps with the exception of cabotage in some jurisdictions.
But this “natural” openness of maritime transport has had the consequence
that the Community has had to take care of other issues, linked to the “exter-
nal” dimension of maritime transport: competitiveness and safety. Let us start
with the former.

* Director, Maritime Transport Directorate, DG TREN, European Commission.

2 fotis karamitsos

II. Shipping Conferences

Defending the competitiveness of the European maritime industry has for

many years been one of the main objectives of Community maritime policy.
It is for the sake of competitiveness that the Member States and the
Commission have set up the well-known arrangements – such as the second
registers or the tonnage tax – capable of re-balancing, at least partially, the
international level playing field for shipping. And they have been quite suc-
cessful in this respect. The trend has been fairly positive for quite some time
now, both in terms of re-flagging to Europe and with respect to the maritime
cluster. Now the challenge is to reconcile this re-achieved competitiveness
with the new era of full implementation of competition rules to maritime
transport, the subject addressed in the first session of today’s colloquium.
In my years in DG TREN I have witnessed the “harvest phase” of compet-
itiveness-related measures: approval by the Commission of several tonnage
taxes, the review of the Guidelines on State aid to maritime transport, re-
flagging towards Europe. Since I have been actively involved in taking care of
competitiveness, I took part in the review of Regulation 4056/86 with lots of
worries. For quite a long time I had no sympathy for the idea that shipping
conferences would be abolished in Europe. My worry was – and to a certain
extent is – that part of our efforts towards the success of maritime Europe
could be jeopardized by a bold innovation which would put Europe at the
forefront of competition law worldwide, but in a disadvantageous position
vis-à-vis its counterparts.
No doubt, from a legal perspective the block exemption of which shipping
lines availed themselves for so many years was quite odd. It was actually so
odd that it had become obsolete in practice, at least as far as price-fixing was
concerned. There were however some advantages, in terms of continuity and
homogeneity across the maritime world.
Anyway, this is now history. The Commission proposed the abolition of the
block exemption and the Council enthusiastically approved it. Let us look
forward. Very soon the Commission will adopt guidelines on the application
of competition law to liner shipping and tramp: the industry will be able to
cooperate, although within the strict limits set by the Treaty.
Obviously there are still some problems to be solved, and not just with
respect to liner shipping.
First, the international set-up. Shipping conferences will no longer be
allowed in Europe but still allowed under other jurisdictions. This is probably
not a “conflict of laws”, technically speaking, but certainly a legal asymmetry
which we will one day have to solve. Why not by lobbying for the abolition of
conferences worldwide?
 ec law and maritime transport 3

A second aspect is the full application of competition rules to tramp, which

is entirely new. We all know that competition rules applied to tramp in the
past. But the absence of precedents due to the inapplicability of the general
procedural rules could make the beginning quite difficult, especially at the
level of national jurisdictions. Let us hope that we will have “good precedents”
in this respect, and no “victims”, who set precedents, so to say.
I am sure that the speeches and the discussions today will contribute to
clarifying the whole picture and to underlining the problems if there are some,
which is always a good thing.

III. Maritime Safety

The global nature of maritime transport raises not only the challenge of global
competitiveness, but also the need to defend our coasts. Maritime safety
standards are properly set at an international level; there are no doubts about
the scientific background and the appropriate character of IMO rules: the
problem is their weak enforcement.
In the field of maritime safety Community law has been providing interna-
tional rules with its own enforcement means over recent years. It has even
reinforced international rules in some cases and adopted specific rules for
domestic shipping. This may imply action which some are keen to call unilat-
eral, but it should not be forgotten that European people would not tolerate
one more catastrophe like the Erika or the Prestige and the European Parliament
has strongly supported a tough stand to protect our seas against substandard
ships.
The time had come for the Commission to be pro-active and not to wait for
further catastrophes and be reactive, which industry had accused us of. This is
the philosophy behind the third maritime safety package which the
Commission, along with the European Parliament, is willing to defend. I
hope that progress will be made in achieving the adoption of the package,
including its last two proposals on Flag State Responsibility and the liability
of areas which just want to make sure that we implement the internationally
agreed rules in the EU.

IV. Ports Policy

Finally, I would like shortly to address one more subject of this colloquium:
ports policy. As you know, the Commission adopted a Communication on
Ports Policy in October last year. The Communication contains an action plan
for the realisation of a fully fledged Community ports policy, but also guidance
4 fotis karamitsos

on the application of the Treaty principles of freedom of establishment and

freedom to provide services to the port sector. Guidance and not specific pro-
visions, obviously; guidance which is based on the case law of the Court of
Justice, with the advantage of flexibility and the disadvantage of less legal
security in respect that a directive would have ensured. In this respect, the
academic world will certainly contribute to the debate on port services, raise
questions and arguments that my colleagues and I will be glad to discuss and
possibly answer. European law has evolved considerably in this way.
The European Commission will continue to be supportive of the sector’s
efforts in meeting these challenges. We are convinced of the strategic impor-
tance of shipping and of the contributions it makes to the European and
world economies.
 PART I

COMPETITION IN SHIPPING
 LINER SHIPPING, ANTITRUST AND THE REPEAL OF
REGULATION 4056/86: A NEW ERA OF GLOBAL MARITIME
CONFRONTATION?

Francesco Munari*

I. The Issues
II. The Historical Antitrust Immunity for Liner Conferences
III. The European Community Faced with this Extraordinary International Regime
IV. Changes in International Liner Shipping and Liberalisation of Trades. Their
Effects on the Liner Conference System
V. Regulation no. 1419/2006: Its Origins, Background and Contents
VI. EC Competition Law in Liner Shipping after October 2008: Preliminary Black,
Grey and White Lists of Agreements among Liner Shipping Companies
Operating in EU Trades
VII. The International Implication of Regulation no. 1419/2006
VIII. Final Remarks

I. The Issues

Before October 2006, the whole shipping sector was subject to special rules:
tramp shipping and cabotage were exempted from the legal regime established
to implement Articles 81 and 82 EC. The Treaty provisions on antitrust might
still be theoretically applied under the provisional instrument established by
Article 84 EC, but in fact this never happened.
The picture was far more complicated in respect of international liner ship-
ping: the UNCTAD Convention on a Code of Conduct for Liner Conferences
had granted an antitrust exemption for liner conferences from 1974; in 1979,
EC Regulation no. 954/791 had welcomed Member States’ ratification of this
international convention and, later, when finally adopting EC legislation on
maritime transport implementing Article 80 EC, the Community antitrust
regime for international liner shipping was consistent with the UN Code of
Conduct: hence, Regulation no. 4056/862 provided a special antitrust regime
for liner shipping, and in particular established a block exemption for liner

* Professor of European Union law, University of Genoa.

1
OJ 1979 L 121/1.
2
OJ 1986 L 378/5.
8 francesco munari

conferences, i.e. for price-fixing cartels among shipowners operating in

international liner trades.
In these years, the international consensus on a special antitrust regime in
liner shipping was strong and was meant to endure, and because of that –
unlike all other block exemptions provided for under Article 81.3 EC – the
block exemption enjoyed by liner conferences was not limited in time.
Yet, after 20 years a thorough reconsideration of the application of compe-
tition rules in the shipping sector took place, and the Community decided to
implement a complex line of actions, the outcome of which was to completely
change the normative framework which had existed hitherto. More precisely,
with the enactment of Regulation no. 1419/2006,3 (a) since October 2006
tramp shipping and cabotage have been added to the sectors covered by
Regulation no. 1/2003, implementing Articles 81 and 82 EC; and (b) starting
on October 18, 2008, liner conferences also no longer enjoy any antitrust
exemption by virtue of Regulation no. 1490/2007.4 Regulation no. 954/79
has been repealed as from October 18, 2008, and Member States no longer
enjoy an “EC cover” allowing them to adhere to the UNCTAD Code of
Conduct for Liner Conferences.
This chapter will offer a preliminary comment on the effects on liner ship-
ping only of the implications deriving from this new European maritime
policy.

II. The Historical Antitrust Immunity for Liner Conferences

Economic and political reasons were, in fact, the main advocates of the anti-
trust immunity enjoyed for so many decades by liner shipping companies.
From the economic point of view, the success story of liner conferences had
its basis in the economic theory arguing and accepting that liner conferences
were necessary to secure the stability of trade. Since the early appearance of
liner conferences in the second half of the XIX century, economic scholars,
first in the US and then also in Europe, had explained that price fixing cartels
in liner shipping were necessary.
This dogma was then also adopted by legal scholars and legislators, long
before the origins of the European Community, and far longer before the
origins of the Community antitrust policy. Therefore, liner shipping compa-
nies ought not to have been subject to cartel prohibitions, since price compe-
tition would have undermined the stability of maritime trades. In this
perspective, one has to note that liner conferences (i.e. price fixing cartels

3
OJ 2006 L 269/1.
4
OJ 2007 L 332/1.
 liner shipping facing new antitrust rules 9

among liner shipping companies) were perceived as being instrumental to the

needs of international commerce, whereas competition in shipping would
have jeopardised its growth and even existence.
The strength of liner conferences in international trades also served as a tool
for western countries to govern these trades, at that time mainly concerning
the trade in goods and their transportation by sea: liner conferences were
hence the weapons with which States controlled their external trades.
In the 1960s, this perception was also acknowledged by other countries;
and liner conferences were seen as a tool to be utilised in world trade, there-
fore also fostering the interests of the less industrialised countries: within the
principles elaborated during the so-called New International Economic Order
(NIEO).5 Liner conferences were used to guarantee equitable participation in
liner trades for liner shipping companies belonging to all countries, and espe-
cially those which, being economically and politically weaker, would not resist
in an open competition scenario.
No wonder that the main rationale of the UN Code of Conduct was to put
all national shipping lines (and the economic systems linked to them) on an
equal footing. This goal was achieved within any given liner conference oper-
ating in trades among countries party to the UN Convention: the restrictions
of competition among shipowners, coupled with the rigid allocation of liner
cargo percentages according to the nationality of the same shipowners (the
40:40:20 formula, where the 20% of trade was reserved to cross-traders), per-
mitted national shipping lines to ply for trade even if they were less efficient
than other carriers operating on the same routes.
In this strategic pattern, antitrust needs were much less important than
stability of international trades, amicable relationships among States having
different levels of development, and “equitable” participation in international
commerce.

III. The European Community Faced with this Extraordinary

International Regime

It is well known that the EC Treaty does not provide clear powers to the
European institutions in the maritime transport sector.6 Whether the

5
See U.N. Doc., Establishment or Expansion of Merchant Marines in Developing Countries,
47 U.N. Doc. TD/26/Rev. 1, 1968; U.N. Doc., The Liner Conference System – Report by the
UNCTAD Secretariat, TD/B/C. 4/62, New York, 1970.
6
Article 80 EC, the last provision on EC transport policy, states that “The provisions of this
title shall apply to transport by rail, road and inland waterway. The Council may, acting by a
qualified majority, decide whether, to what extent and by what procedure appropriate provisions
may be laid down for sea and air transport. The procedural provisions of Article 71 shall apply”.
10 francesco munari

Community should adopt legal provisions in this field was debated for almost
thirty years, and at the time the UN Code of Conduct was adopted, there was
as yet no EC maritime policy. No wonder, therefore, that the first package of
regulations enacted by the end of 1986 in our field, i.e. the EC shipping policy
as we used to know it, remained consistent with the international models
which had meanwhile codified the legitimacy of liner conferences.
Indeed, this should not sound as a criticism of the choices made at that
time by the European Community: as a matter of fact, many Member States
would have opposed an EC maritime policy which went against the interna-
tional mainstream. Furthermore, and more particularly, the 1986 Brussels
Package 7 was not in any way bad legislation: just to mention the two more
significant pieces of legislation enacted within this Package, Regulations nos.
4056/86 and 4055/86, implementing the freedom to provide services in mari-
time transport, have quite properly served the needs of the European mari-
time industry, while preserving its capacity to operate in global trades.
Yet, if we consider antitrust policy in its essence, the idea of hard core car-
tels being exempted from the prohibitions of Article 81 EC was hard to live
with.
And in fact, after an initial “relaxed” implementation of the EC competi-
tion rules in liner shipping,8 which was mainly justified by reasons of coexist-
ence and cooperation with third countries in international maritime trade
issues, the Commission and the Court of First Instance made it clear that the
antitrust immunity enjoyed by liner conferences was not to be intended as an
overall retreat of EC competition rules in the maritime sector.
Suffice it to mention that, in respect of the consortium agreements which
had meanwhile developed in containerised liner trades, the Commission was
adamant in excluding any price or tariff agreements among the members of a
consortium from the exemption granted to such agreements under Article

This ‘open’ provision for many years prevented the EC from enacting its own rules on maritime
policy.
7
This package included four regulations, i.e. Council Regulation (EEC) No 4055/86 of 22
December 1986 applying the principle of freedom to provide services to maritime transport
between Member States and between Member States and third countries; Council Regulation
(EEC) No 4056/86 of 22 December 1986 laying down detailed rules for the application of
Articles 85 and 86 of the Treaty to maritime transport (op. cit.); Council Regulation (EEC) No
4057/86 of 22 December 1986 on unfair pricing practices in maritime transport; Council
Regulation (EEC) No 4058/86 of 22 December 1986 concerning coordinated action to safe-
guard free access to cargoes in ocean trades. All of them were published in the OJ 1986 L
378/1 ff.
8
See the Commission decisions Shipowners’ Committees, OJ 1992 L 134; Cewal, Cowac,
Ukwal, OJ 1993 L 34.
 liner shipping facing new antitrust rules 11

81(3) EC by Regulation no. 870/1995,9 and then by Regulation no.

823/2000.10
It was also established that, if the consortium members were also parties to
a liner conference, then the conditions in which the consortium could enjoy
the antitrust exemption would become stricter, and would also affect the abil-
ity of the shipping companies to adhere to a conference, at least when the
need to exploit a given liner service jointly with other carriers was more impor-
tant (as normally happens for container services) than the need to agree com-
mon rates and tariffs with them.
By the same token, unlike that for liner conferences, but identically to all
other block exemptions, the exemption for consortia was limited in time, and
is going to expire in 2010.11
Apart from that, the Commission and the Court of First Instance worked
out a rigorous approach in their case law aimed at restricting as far as possible
the block exemption established by Regulation no. 4056/86. Hence, also tak-
ing advantage of the new global scenario surrounding maritime liner trades
(which will be briefly summarised below), the Commission made it clear
that:

– for liner conferences, no discrimination or distortion in trade may take place

vis-à-vis shippers, ports or users, who must always be granted, ceteris pari-
bus, equality of treatment, and no excessive imbalance may result in the
respective bargaining positions of conference members and shippers;
– for consortia, exemption from antitrust rules can be obtained only if suffi-
cient level of competition remains both in the market and among the mem-
bers of the consortium agreement;
– for both liner conferences and consortia, no per se immunity can be pro-
nounced; rather, exemption may be granted only on a case-by-case analysis
and if actual and potential competition exists in any given trade.12

In this vein, it was established that the alleged stability in trade offered by liner
conferences is not to be treated as an undisputed value, and has to be traded

9
OJ 1995 L 89/7.
10
Commission Regulation (EC) No 823/2000 of 19 April 2000 on the application of
Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices
between liner shipping companies (consortia), in OJ 2000 L 100/24. This regulation was modi-
fied by Commission Regulation (EC) no. 611/2005, OJ 2000 L 101/10, extending inter alia
the block exemption for consortia until 25 April 2010.
11
More precisely, on 25 April 2010 (see Article 2 of Commission Regulation (EC) no.
611/2005 OJ 2005 L 101/10).
12
See the Trans Atlantic Conference Agreement (TACA) decision, OJ 1999 L 95/1.
12 francesco munari

off against the need to have a given degree of competition in any case, this
latter principle always prevailing over the former.13
Furthermore, no derogation can be allowed from Article 82 EC, it being
clear that conference members can collectively enjoy a dominant position and
therefore become individually liable for its abuse.14
In other words, consistently with the treatment granted to all exceptions to
paramount rules such as those concerning competition, a strict interpretation
of the antitrust immunity enjoyed by horizontal agreements among shipown-
ers gradually but steadfastly took place.15 Consequently, there is no room for
exempting tariff agreements among conference members encompassing non-
maritime legs;16 no exemption can be enjoyed by agreements among shipown-
ers limiting the capacity offered in a given trade aimed at reducing or excluding
marginal freight at lower rates;17 no additional restrictions can be imposed for
loyalty agreements with shippers in excess of those expressly provided for in
Regulation no. 4056/86,18 and no exchange of commercial information may
take place among members of a consortium agreement.19

IV. Changes in International Liner Shipping and Liberalisation of

Trades. Their Effects on the Liner Conference System

The political and economic situation under which liner conferences and their
antitrust immunity had flourished was not, however, to endure forever, and by
the last decade of the XX century two further massive changes had happened
in international liner shipping: first, the definitive replacement of older tradi-
tional liner shipping methods by container shipping; secondly, the modified
patterns of international trade developing from the collapse of the socialist
block and the economic models based on State-planned economies.
The advent of containerisation in liner shipping determined substantial
concentration in the market, through a M&A process which started some
twenty years ago, determined the acquisition of many “national shipping
lines” by larger undertakings operating worldwide, and is still under way.

13
See the Europe Asian Trade Agreement (EATA) decision, OJ 1999 L 193/23, and especially
at para. 191 ff.
14
See Joined Cases T-24, 25, 26 & 28/93 CMB, Dafra, Deutsche Afrika Linien and Nedlloyd
v Commission [1996] ECR II-543.
15
Case CMB et al., ibid.; Case T-395/94 Atlantic Container Line et al. v Commission [2002]
ECR II-875.
16
TACA decision, op. cit., note 12.
17
EATA decision, op. cit., note 13.
18
See once again Case CMB et al., op. cit., note 14.
19
See again the EATA decision, op. cit., note 13.
 liner shipping facing new antitrust rules 13

Liberalisation in international trade also affected liner shipping companies

and their claim to carry a portion of their “national trade”; more generally, it
fostered a historical and political context quite different from that in which
the UNCTAD Code of Conduct had been imagined and, thereafter,
adopted.
Meanwhile, containerisation in liner shipping had brought about new
forms of cooperation among shipowners (the so-called consortia agreements),
and at the same time had modified the patterns of trade among countries,
through the creation of transhipment ports and a “hub and spoke” organisa-
tional model for liner shipping not unlike that for air transport.
These processes are long and are still continuing today, and one cannot seri-
ously deny that the present picture is totally different from that in which liner
conferences, the UN Code of Conduct and the same Regulation no. 4056/86
flourished.
Yet, even in this completely changed world, the liner conference model
resisted, and in some trades even improved. But the reason for this was no
longer the original one, described above; rather, it was for the opportunity the
conference system gave – and still gives – to shipowners to discuss rates and
tariffs.
Yet, in this modified factual and legal scenario, doubts arose as to the con-
tinuing need to grant a large antitrust immunity for price fixing cartels in liner
shipping; and important institutions started seriously to consider whether
such a model was still necessary for the good of international trade. Among
them is the OECD, which in 2002 published a thorough and important study
on Competition Policy in Liner Shipping.20 This Report first analyses the impor-
tant changes which have taken place in the liner shipping sector, in particular
as regards the impact of containerisation. Based on this analysis, it concludes
that:
“[m]any have portrayed the liner shipping sector as “unique” and therefore
requiring special treatment under competition law. This is true insofar as any
industry is unique and certainly there are convincing reasons to allow carriers
to co-ordinate certain operational aspects linked to the provision of ocean
shipping services. However, it is more difficult to perceive in which manner
liner shipping is more ‘unique’ than any other industries, or why it should be
treated more favourably or even differently than other transport providers
with respect to price-fixing and rate discussions. The cost structure of the
industry is not significantly different from that of other transport industries

20
OECD Directorate for Science, Technology and Industry, Division of Transport, Final
Report, doc. DSTI/DOT/2002.2, 16 April 2002, also in www.oecd.org.
14 francesco munari

and returns in liner shipping are similar to those of other scheduled transport
providers. While it is true that ships cost considerably more than say, a new
lorry or locomotive, each ship can also earn significantly more revenue.
Seasonal and directional trade imbalances are not unique to the liner sector
and must be faced by most transport service providers – in same cases these
imbalances pose much more of a problem since some vehicles are not as stand-
ardised as container ships. In the end, liner shipping is about as “different”
from other like industries as, for example, trucking is to freight air services or
freight air is to rail freight – with the exception that price-fixing is allowed in
liner shipping and nearly universally dis-allowed in these other industries”.21
Having clarified the above, the OECD recommends “Member countries,
when reviewing the application of competition policy in the liner shipping
sector, seriously consider removing anti-trust exemptions for price fixing and
rate discussions. Exemptions for other operational arrangements may be
retained so long as these do not result in excessive market power”.22 In particu-
lar, it was suggested that Member States adopt rules on competition in liner
shipping based on the following principles:
freedom to negotiate: shippers and carriers should always have the option
freely to negotiate rates, surcharges and other terms of carriage on an individual
and confidential basis;
freedom to protect contracts: carriers and shippers should always be able
contractually to protect key terms of negotiated service contracts, including
information regarding rates, and this confidentiality should be given maxi-
mum protection;
freedom to coordinate operations: carriers should be able to pursue operational
and/or capacity agreements with other carriers as long as these do not confer
undue market power on the parties involved.23

V. Regulation no. /: Its Origins, Background and Contents

The OECD Report was adopted contemporaneously with the EU reform of

competition rules, which took place through the enactment of Regulation no.
1/2003.24 This Regulation thoroughly amends the application rules of Articles
81 and 82 EC which were adopted forty years earlier in Regulation no. 17,25
and in particular fosters a decentralised application of Articles 81 and 82 at

21
OECD Report, para. 187, p. 75.
22
OECD Report, para. 201, p. 78.
23
OECD Report, paras 206, 208, 212, p. 79–80.
24
OJ 2003 L 1/1.
25
OJ 1962 L 13/204.
 liner shipping facing new antitrust rules 15

the Member States level, cooperation between national antitrust authorities

and the Commission on competition matters, and a more important role for
national courts in this field.
The modernisation of European competition law, coupled with the recom-
mendations coming from the OECD, eventually persuaded the EU institu-
tions also to tackle the extravagant EC antitrust regime for shipping. Given
the modified scenario of liner shipping in international trade and the decreased
importance of the “national shipping lines” as necessary players in maritime
liner transport, the opportunity was taken to bring such transport into line
with all other sectors of the economy.
The option chosen by the Commission, fully backed by the Council, was
the most radical, i.e. the repeal of all special competition rules existing for
shipping with the exception of the block exemption for consortia.
This is, in essence, the content of Regulation no. 1419/2006, which on the
one hand establishes that liner shipping, tramp shipping and cabotage fall
within the general rules of Regulation no. 1/2003,26 and on the other hand
abolishes Regulation no. 4056/86, subject to a two years moratorium for liner
conferences which is going to expire in October 2008.
The recitals of Regulation no. 1419/2006 expressly provide ample reasons
to justify the removal of the block exemption for liner conferences. Almost
copying from the OECD Report and the economic analysis of the liner sector
stemming from this Report, the EC legislator is keen to specify that no unique
features exist for the liner shipping sector, because the cost structure of ship-
ping lines does not differ substantially from that of other firms. Hence, no
evidence exists to indicate that this sector should be protected from the appli-
cation of competition rules.
Moreover, detailed reasons are provided to explain why none of the four
conditions precedent under Article 81(3) EC is satisfied, and therefore why
no exemption from cartel prohibition can be obtained for agreements fixing
rates or allocating capacity among shipowners.
In this regard, an analysis of this part of Regulation no. 1419/2006 may be
useful, also as a tool to visualise how the Commission, the national antitrust
authorities and also Member States’ domestic courts are going to consider
arrangements restricting competition among shipping lines after the expiry of

26
This result is obtained through the repeal of Article 32 of Regulation no. 1/2003, which
excluded from its scope of application “(a) international tramp vessel services as defined in
Article 1(3)(a) of Regulation (EEC) No 4056/86; (b) a maritime transport service that takes
place exclusively between ports in one and the same Member State as foreseen in Article 1(2) of
Regulation (EEC) No 4056/86; (c) air transport between Community airports and third
countries”.
16 francesco munari

the two-year moratorium for liner conferences. First, concerning the condition
requiring that the restrictive agreement contribute to improving the produc-
tion or distribution of goods or to promoting technical or economic progress,
recital no. 4 contends that conferences are no longer efficient, because they
have ceased to apply “the conference tariff although they still manage to set
charges and surcharges which are a part of the price of transport”. Furthermore,
no evidence exists showing that the conference system leads to more stable
freight rates or more reliable shipping services than would be the case in a fully
competitive market, due consideration being taken of the fact that conference
members “increasingly offer their services via individual service agreements
entered into with individual exporters. In addition, conferences do not man-
age the carrying capacity that is available as this is an individual decision taken
by each carrier. Under current market conditions price stability and the relia-
bility of services are brought about by individual service agreements. The
alleged causal link between the restrictions (price fixing and supply regula-
tion) and the claimed efficiencies (reliable services) therefore appears too tenu-
ous to meet the first condition of Article 81(3)”.
Secondly, as regards compensation to consumers which must be awarded to
offset the negative effects resulting from the restriction of competition, recital
no. 5 is quite clear in qualifying the negative effects of price fixing agreements
as “very serious”, and stating that “no clearly positive effects have been identi-
fied” for them. Hence, the conclusion is straightforward in stating that the
second condition of Article 81(3) EC is also not fulfilled by liner conferences.
Thirdly, in respect of the proportionality principle, recital no. 6 points out
that practice and market usage show that “adequate, reliable and efficient
scheduled maritime services” can be achieved through much less restrictive
agreements than those permitted under Regulation no. 4056/86 (price fixing
and capacity regulation), which are therefore not considered to be indispensa-
ble for the purposes of Article 81(3) EC: examples of these agreements are
both the consortia “that do not involve price fixing and are therefore less
restrictive than conferences”, and the individual service agreements, which
“do not restrict competition and provide benefits to exporters as they make it
possible to tailor special services”, while at the same time fostering price stabil-
ity “because the price is established in advance and does not fluctuate for a
predetermined period (usually up to one year)”.
Fourthly, referring to the requirement that arrangements restrictive of com-
petition should anyway remain subject to effective competitive constraints,
recital no. 7 notes that, while conferences exist in nearly all major trade lanes
and compete with carriers grouped in consortia and with independent lines,
this is not sufficient to provide that price competition may effectively take
place. This is because “whilst there may be price competition on the ocean
 liner shipping facing new antitrust rules 17

freight rate due to the weakening of the conference system there is hardly any
price competition with respect to the surcharges and ancillary charges. These
are set by the conference and the same level of charges is often applied by non-
conference carriers”. In addition, since carriers participate in conferences and
consortia on the same trade, they exchange commercially sensitive informa-
tion and add to the benefits of the conference (price fixing and capacity regu-
lation) those of the consortia (operational cooperation for the provision of a
joint service) block exemptions. Therefore, “given the increasing number of
links between carriers in the same trade, determining the extent to which
conferences are subject to effective internal and external competition is a very
complex exercise” and cannot be dealt with under a block exemption; rather,
the solution may found “only … on a case by case basis”.
The need for such an extensive explanation of the reasons why the block
exemption for liner conferences is to be abolished hides an implicit concern
by the European legislator about the consequences of such a decision on the
international liner trades touching European ports.
Clearly, liner conferences still exist in world shipping. The European
Economic and Social Committee recently counted some 150 operating con-
ferences, 28 of which are operating along routes connecting EU countries.27
An individual exemption for these agreements does not seem probable, and
the two-year moratorium established prior to the lifting of the block exemp-
tion is meant to induce shipping lines carrying out liner trades with the EU to
leave these conferences or, even better, to terminate them. In fact, apparently
this is what is being undertaken by many liner shipping lines established in
the EU Member States which are going to comply with the new antitrust
scenario set out in Regulation no. 1419/2006.

VI. EC Competition Law in Liner Shipping after October :

Preliminary Black, Grey and White lists of Agreements among
Liner Shipping Companies Operating in EU trades

Since the expiry of the two-year moratorium provided for shipping confer-
ences by Regulation no. 1419/2006, liner maritime transportation has become
subject to general antitrust rules. This obliges scholars and operators to
question whether, after this term, any room is left for arrangements restricting
competition in liner shipping trades.

27
See the EESC Opinion (2007/C 256/12) on the proposal of the Commission
COM(2006)869 def. - 2006/0308 (COD) regarding the adoption of the regulation repealing
Regulation no. 954/1979, OJ 2007 C 256/62, point 2.1.
18 francesco munari

As regards liner conferences, the Commission has made it very clear that,
after October 18, 2008, those operating between trades to and from Member
States “shall become illegal”.28 Therefore, notwithstanding the ambiguous
wording of recital no. 7 of Regulation no. 1419/2006 which seems to refer to
an individual decision (and no longer to a block exemption), the determina-
tion of “the extent to which conferences are subject to effective internal and
external competition” for the purposes of Article 81(3) EC, I am quite scepti-
cal whether liner conferences may in future escape the cartel prohibition.
This is not to say that all arrangements among liner shipowners have become
invalid. For instance, technical arrangements continue to be available for ship-
ping lines, since they do not affect competition and therefore fall outside the
scope of application of Article 81 EC.29 Secondly, an exception continues to
hold for consortium agreements falling within the block exemption estab-
lished by Regulation no. 823/2000, which is going to be modified to adjust its
contents to the repeal of Regulation no. 4056/86,30 and the validity of which
may be extended even beyond 2010.31
However, if we depart from these kinds of agreements, my belief is that the
room for manoeuvre left to shipping lines operating in EU trades seems very
narrow. Horizontal agreements among undertakings are always very difficult

28
See the Commission proposal for the repeal of Regulation no. 954/79, Doc. COM(2006)
869, 30 January 2007.
29
This is the lesson stemming from Article 2 of Regulation no. 4056/86, establishing that
“The prohibition laid down in Article 85(1) [and now 81(1)] of the Treaty shall not apply to
agreements, decisions and concerted practices whose sole object and effect is to achieve techni-
cal improvements or cooperation by means of: (a) the introduction or uniform application of
standards or types in respect of vessels and other means of transport, equipment, supplies or
fixed installations; (b) the exchange or pooling for the purpose of operating transport services,
of vessels, space on vessels or slots and other means of transport, staff, equipment or fixed instal-
lations; (c) the organization and execution of successive or supplementary maritime transport
operations and the establishment or application of inclusive rates and conditions for such oper-
ations; (d) the coordination of transport timetables for connecting routes; (e) the consolidation
of individual consignments; (f ) the establishment or application of uniform rules concerning
the structure and the conditions governing the application of transport tariffs”. Clearly, the
repeal of this provision (having only a declaratory nature) does not deprive this kind of agree-
ment of full legitimacy under EC antitrust law. In fact, it contributes to fostering certainty of
the law, given the ambiguity accompanying this provision (which also existed in air transport
and was repealed in 2004 by Regulation no. 411/2004, OJ 2004 L68/1. The irrelevance of
these technical agreements for the purposes of Article 81 EC has been confirmed in several cases
(see the Far Eastern Freight Conference (FEFC), OJ 1994 L 378/17; Far East Trade Tariff Charges
and Surcharges Agreement (FETTCSA) decisions, OJ 2000 L 268/1; Case T-229/94 Deutsche
Bahn v Commission [1997] ECR II-1689, and is no longer disputed (see recently the Commission
Guidelines on the application of Article 81 of the EC Treaty to maritime transport services—
Draft, OJ 2007 C 215/3 (hereinafter, the “Draft Guidelines”), and in particular para. 35.
30
This is confirmed by recital no. 3 of Regulation no. 611/2005 (op. cit. note 10) and by
the Draft Guidelines, para. 6.
31
Pursuant to recital no. 11 of Regulation no. 1419/2006, “In light of the global nature of
the liner shipping industry, the Commission should take the appropriate steps to … maintaining
 liner shipping facing new antitrust rules 19

to justify under competition law and, given the relatively simple nature of the
liner shipping business, it is hard to find – in addition to consortia – particular
instances where arrangements restricting competition may be considered pro-
competitive, and hence potentially capable of benefiting from an individual
exemption under Article 81(3) EC. On the other hand, the case law which has
been developed at EC level does not seem to allow the singling out of further
cases for the non-application of the cartel prohibitions: in this vein. Suffice it
to mention the outcome of the debates which took place in the aftermath of
the entry into force of Regulation no. 4056/86, in particular with respect to
the possibility of providing for a broad interpretation of the “technical agree-
ments” excluded from the scope of application of Article 81 EC, capable also
of encompassing agreements which, apparently technical in nature, had (side)
commercial implications. Advocates of such a broad interpretation were con-
stantly ignored by the case law of the Commission and of the Court of First
Instance, which never agreed to deviate from a narrow interpretation of any
exemption to antitrust cartel prohibitions.32
The Draft Guidelines recently adopted by the Commission33 confirm that
no longer may any special interpretation or application of EC competition
rules be expected in liner shipping, and in fact in any kind of shipping: hence,
with the exception of the block exemption for consortia (which anyway falls
within the general regime established by Article 81(3) EC), the future reason-
ing for any anti-competitive practice adopted in our sector will be the same as
that applied in general in EC antitrust law.
In particular, a case-by-case approach will be used in evaluating any behav-
iour capable of triggering the application of Article 81 (or 82) EC. And this
will imply the usual investigation concerning, for instance, matters such as (a)
effect on trades between Member States, (b) relevant market (product and
geographic dimension), and (c) market share.34
If we now consider the behaviour of relevant players in the liner shipping
market, it can easily be foreseen which situation may deserve attention from
the competition law point of view.
I do not believe that vertical arrangements may raise particular concerns or
interest, at least as long as they are not intertwined with issues of a dominant
position (single or joint) held by any of the parties to these agreements: while
service contracts will continue to be available to shipping lines, I believe that

the exemption for operational cooperation between shipping lines grouped in consortia and
alliances, in line with the recommendations of the OECD Secretariat in 2002”.
32
See the case law, supra, notes 12, 13 and 14.
33
See note 29.
34
See the Draft Guidelines, following exactly this line of reasoning.
20 francesco munari

the same can be said, almost certainly, also for exclusivity or loyalty arrange-
ments, if and when they may be still practicable.
An assessment of horizontal agreements appears to be more interesting. For
such agreements, and subject to particular nuances which may emerge from
the case-by-case approach announced by the Commission, the following pre-
dictions may in general be expected. In the first place, one can reasonably rule
out price fixing agreements being allowed. This applies not only to agreements
regarding freight tariffs, given the abolition of liner conferences, but also to all
arrangements on other elements coming together to compose the costs of
(maritime) transport: I refer to surcharges, agency fees, and similar. Additionally,
for operational and technical agreements (including cargo/volume pooling),
the existing block exemption for consortia will continue to set the limit
between legal and illicit practices, and I would warmly suggest that shipping
lines do not overstep the boundaries provided for by Regulation no. 823/2000
as amended.
More uncertain is the evaluation of information exchanges: while their
treatment will follow an abundant case law which has developed over more
than thirty years of ECJ case-law,35 caution will have to be employed by liner
shipping companies in exchanging their pricing or commercial policies, but
even to carry out unilaterally announcements of these policies to the public.
The frequency of these practices will be also relevant, as will the degree of
concentration of the market in which these practices occur.36
In this vein, even if it is settled case law that Article 81 of the Treaty does
not prevent undertakings from adapting themselves intelligently to the existing
or anticipated conduct of competitors,37 one has to keep in mind that many
liner trades have oligopolistic characteristics, which consequently implies a
more rigorous evaluation of the anti-competitive effects of information
exchanges. On the other hand, transparency in the market is normal, and
this should, in my view, always be taken into consideration as a mitigating
factor in assessing the anti-competitive effects of information exchange or
dissemination.

35
See Joined Cases 40–48, 50, 54–56, 111, 113–114/73 Suiker Unie v Commission [1975]
ECR 1663; Cases C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 & C-125/85 to
C-129/85 A. Ahlström Osakeyhtiö and others v Commission [1993] ECR I-01307; Case T-35/92
John Deere Ltd v Commission [1994] ECR II-957; Case C-7/95 P John Deere v Commission
[1998] ECR I-3111; Case C-49/92 P Commission v Anic Partecipazioni [1999] ECR I-4125;
Case C-194/99 P Thyssen Stahl v Commission [2003] ECR I-10821; Case C-238/05 Asnef-
Equifax v Asociación de Usuarios de Servicios Bancarios (Ausbanc) [2006] ECR I-11125.
36
See the Draft Guidelines, in particular paras 39 et seq.
37
This principle has been established by the ECJ since the Suiker Unie case (op. cit., note
35), paras 173–174.
 liner shipping facing new antitrust rules 21

Moving from predictions to current practice, the present trend of liner

shipping companies operating within European trades is to leave liner confer-
ences or terminate conference agreements and reduce any exchanges of infor-
mation between shipping lines participating in liner consortia to the extent
that they are ancillary to and necessary for the joint operation of relevant liner
transport services. This seems to be sound and safe behaviour, due considera-
tion being paid to the fact that, quite probably, public antitrust enforcement
in liner shipping is going to take place, especially in the immediate aftermath
of the abolition of the old regime, in order to force the liner shipping compa-
nies operating in EU trades to adapt to EC competition law as soon as
possible.

VII. The International Implication of Regulation no. /

The Community decision to sanction liner conferences will probably have

spill-over effects with third countries. One can accept that, after October 18,
2008, all liner conferences existing in trades with EU countries are no longer
allowed under Regulation no. 1419/2006. However, the UN Code of Conduct
still exists and still binds those 16 Member States which have ratified it 38 and
have not yet denounced it: therefore, there may well be conflicts in the inter-
national legal arena. Besides, this would not be the first time, given that these
conflicts occurred, and were pretty harsh, between the 1960s and the 1970s.
In particular, the following situations may occur. The first case may be that
in which the liner conference(s) operating in a given route between EU and
third countries is (are) terminated: in this case, if no liner conference exists,
then the UN Code of Conduct does not apply. Hence, no problems arise.
But it may also well be that liner conference(s) operating in a given route
between EU and third countries is (are) not terminated. If it is probable that
all European shipping lines will leave liner conferences in order to avoid
being subject to infringement proceedings under Article 81 EC, this may not
necessarily also be done also by non-EU shipping lines. If these lines claim to
be protected by the UN Code of Conduct, then significant problems may
arise: Article 2(5) of the UN Code of Conduct provides for the case in which
no national shipping lines (i.e. no EU shipping lines) participate in the con-
ference trade. This simply increases the share of the conference trade for the
lines which are members of the conference, but does not exclude the application

38
Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Italy, Malta,
The Netherlands, Portugal, Rumania, Slovakia, Spain, Sweden and United Kingdom. Norway
(a Member of the EEA) is also party to the UN Convention.
22 francesco munari

of the UN Code of Conduct. Clearly, the conference will compete with non-
conference lines, and will probably have a reduced market share. Yet, I am
sceptical whether this conference may ever escape EC price-cartel prohibition,
unless its market power is so weak as to be considered irrelevant from the
competition law point of view, since effects on competition in the affected
market are not substantial.
However, should the EC sanction the non-EU conference members, then
problems may well arise at international level between the Member State in
which the conference operates and third countries: as long as the former
remains a party to the UN Convention, then the latter may well contest that
the EC steps preventing such Member State from honouring the international
obligations it undertook when ratifying the UN Code of Conduct amount to
an infringement of the international obligation of that State. After all,
Regulations nos. 1419/2006 and 1490/2007 were voted on and approved by
the Member State’s representative sitting in the Council when such Member
State was party to the UN Convention. From a strict international law point
of view, I tend to believe that the Member State affected may well encounter
difficulties in justifying its conduct vis-à-vis the third country.
These problems cannot be underestimated, and in this vein, one can share
the position taken by the European Economic and Social Committee in its
opinion on the proposed repeal of Regulation no. 954/1979. More precisely,
the EECS takes the view that a mere competition policy approach is not
satisfactory, and urges a more complete assessment of the whole matter, deal-
ing also with the international repercussions of EU relationships with third
countries.39 Yet, this plea has remained unheeded.
On the other hand, if the EC expected that the 16 Member States party
to the UN Code of Conduct would denounce it pursuant to its Article 50
(2) prior to the expiry of the two-year moratorium established by Regulation
no. 1419/2006 for liner conferences and to the entry into force of Regulation
no. 1490/2007,40 then this expectation was wrong. At the time this chapter

39
See Opinion of the European Economic and Social Committee on the ‘Liner
Conferences—United Nations Convention’ COM(2006)869 final—2006/0308 (COD), OJ
2007 C 256/62. Specifically, the EESC “strongly believes that the present issue cannot be
examined only through the competition law perspective. The political and maritime trans-
port policy dimensions of repealing the liner conference system in the EU and thereby also
of Regulation 954/79 cannot be underestimated. Therefore, the EESC fails to understand the
urgency of the Commission proposal to repeal Regulation 954/79 since the international
repercussions of the EU’s policy on competition rules for maritime transport and in particu-
lar of repealing the liner conference system, have not yet been addressed properly, despite
multiple requests thereto” (see point 4.8).
40
Denunciation is permitted by the UN Code of Conduct with a minimum of one year’s
notice, and this term seems coherent with the timing provided for by the EC Regulations under
discussion.
 liner shipping facing new antitrust rules 23

was written, none of the Member States had withdrawn from the UNCTAD
Convention.41
This, in turn, may have other negative effects within the EU arena. Since
the entry into force of the above EC Regulations, I believe that Member States
have become obliged to denounce the UN Code of Conduct. This opinion is
based on the case law already developed by the ECJ since the entry into force
of the 1986 Package of regulations. Member States were considered to have
infringed their obligations under the EC Treaty because they had not amended
nor taken action to amend the then existing bilateral agreements with third
countries in order to adapt them to the new EC maritime law.42
I assume that, if nothing has yet been done by Member States, they should
take appropriate action to avoid problems both at EU level and in the inter-
national plane.

VIII. Final Remarks

Regulation no. 1419/2006 and the lifting of the antitrust immunity for liner
conference will probably have an influence far beyond the EU.
The idea of a sort of regulatory framework for world liner shipping has finally
bowed to liberalisation and globalisation. In this vein, international economic
law also no longer serves the “political” interests of the States, i.e. to allocate to
each of them a fair share of liner shipping trades, hence also giving them the
opportunity to cover “marginal” viz. periphery trades, or to sustain competi-
tiveness in certain geographic areas. Nowadays, market forces and “global”
players are overwhelming and wish there to be no boundaries to their actions.
However, one cannot deny that this choice by the EU coincides with a
moment in which European shipping lines have a large share of the world
market for water-borne transportation. And presumably, non-European
competitors are seen as not capable of threatening the strength of the European
liner shipping industry. This situation may not continue over time, and if the
market position of European shipping lines were to fade, then the advantages
of world shipping liberalisation might again be cast in doubt. Yet, in that case
the driver for legislative or political decisions aimed at reserving (again) to our
shipping lines a “fair” share of our trade would probably be much less noble
than in the past.

41
When this Article was written, the UNCTAD website (albeit updated only on 25 June
2008) did not reveal any denunciation by the EU Member States participating in the UN Code
of Conduct.
42
See Cases C-176 & 177/97 Commission v Belgium and Luxembourg [1998] ECR I-3557;
Case C-170/98 Commission v Belgium [1999] ECR I-5493; Case C-171/98, C-201/98 &
C-202/98 Commission v Belgium and Luxembourg [1999] ECR I-5517.
24 francesco munari

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Baratta R., La ripartizione tra Comunità e Stati membri delle competenze esterne in materia di
servizi di trasporto marittimo, in Dir. dell’Unione europea, 2002, 17.
Bennathan E., Walters A. A. The Economics of Ocean Freight Rates, New York, 1969.
Bennathan E., Walters A. A. Shipping Conferences: an Economic Analysis, in 4 J. Marit. L. &
Comm., 1972, 93
Bosies W.J. Jr, Green W. G., The Liner Conference Convention: Launching an International
Regulatory Regime, in 6 L.& P. Int’l Bus., 1974, 533.
Brignardello M., Le conferenze marittime, in Trattato breve di diritto marittimo (Antonini ed.),
Milan, 2007, 505.
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Carbone S. M., D’angelo A., Conferenze marittime, in Digesto. Disc. Priv./Sez. Comm., vol. III,
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Carbone S. M., Munari F., Regole e organizzazione dei trasporti marittimi internazionali, Milan,
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Carbone S. M., Munari F., Conferenze marittime e consorzi, in Enc. Del Diritto, Aggiornamento
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comune: good bye maritime conferences e altre importanti novità a valle dell’entrata in vigore
del Reg. (CE) n. 1419/2006, in Dir. dei trasporti, 2007, 335.
Casanova M., Brignardello M., Diritto dei Trasporti. Infrastrutture e accesso al mercato, Milan,
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Cerruti G., Chirco M., La disciplina comunitaria dei traffici marittimi internazionali di linea,
Genoa, 1996, 191.
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Clyde P. S., Reitzes J. D., The Effectiveness of Collusion under Antitrust Immunity: The Case of
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Ellsworth R. A., Competition or Rationalization in the Shipping Industry?, in 10 J. Marit. L. &
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Mgmt, 1977, 227.
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Gardner B., Steamship Conferences and the Shipping Act, 1916, in XXXV Tulane L. Rev., 1960,
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Commitment to Cartels, in 18 The Geo. Wash. J. Int’l L. & Econ., 1984, 1.
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Rev., 1969, part. I, p. 90 ss.; 1970, part. II, 256.
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Consortia, in EU Competition Policy Newsletter, October 2000, No. 3, 44.
 INFORMATION EXCHANGE AGREEMENTS BETWEEN
LINER SHIPPING COMPANIES UNDER
EC COMPETITION LAW

Alla Pozdnakova*

I. Co-operation in Liner Shipping: A Prospective View

II. Commission Guidelines on the Application of Article 81 EC to Maritime
Transport Services
III. Information Exchange Agreements between Liner Shipping Companies
IV. Liner Consortia, Market Transparency and the Review of Competition Regulation
in Shipping
V. Co-ordinated Conduct of Liner Shipping Companies and Article 82 EC
VI. Concluding Remarks

I. Co-operation in Liner Shipping: A Prospective View

On 18 October 2008, the special rules which applied to the liner shipping
sector in the European Union were repealed and maritime transport operators
have finally become fully exposed to the general competition regime estab-
lished by Articles 81 and 82 of the EC Treaty.1 Repeal of the liner conference
block exemption will not, however, put an end to all forms of horizontal co-
operation between competing carriers.
It is unlikely that liner shipping companies will attempt to set up explicit
cartels in EU trades in the form of traditional liner conferences.2 Such activi-
ties are clearly prohibited by Article 81(1) EC and the conditions for exemp-
tion contained in Article 81(3) EC would not be fulfilled.3 In any case,

* Dr. Jur., University of Oslo, Scandinavian Institute of Maritime Law.

1
Council Regulation No 1419/2006 of 25 September 2006 repealing Regulation (EEC)
No 4056/86 laying down detailed rules for the application of Articles 85 and 86 of the Treaty
to maritime transport, and amending Regulation (EC) No 1/2003 as regards the extension of
its scope to include cabotage and international tramp services, OJ [2006] L 269/1.
2
On liner conferences generally, see Blanco, L.O., Shipping Conferences under EC Antitrust
Law. Criticism of a Legal Paradox (translated by A. Read), Oxford, Hart Publishing, 2007;
Herman, A., Shipping Conferences, Deventer, Kluwer Law and Taxation Publishers, 1983;
Marx, D., International Shipping Cartels: A Study of Industrial Self-Regulation by Shipping
Conferences, 2nd Ed. New York, Greenwood Press, 1969.
3
In principle, even “hard-core” restrictions on competition, such as price fixing, capacity
limitation and market sharing, are not excluded from the scope of the exemptions in Article
81(3) EC: see Case No. T-17/93 Matra Hachette SA v. Commission [1994] ECR II-595, § 85.
However, they will only in exceptional circumstances fulfil the conditions for exemption under
Article 81(3) EC: see A. Pozdnakova, Liner Shipping and EU Competition Law, Alphen a/d
Rijn: Kluwer Law International, 2008, pp. 123 et seq.
 information exchange agreements between liner shipping companies 27

traditional liner conferences had lost their appeal to carriers even before the
review of the liner conference block exemption,4 as modern carriers prefer to
co-ordinate their pricing and other market strategies in more flexible ways.
This is well illustrated by the rate discussion agreements implemented in US
trades5 and the so-called stabilisation (tolerated outsider) agreements which
allow carriers to adjust prices and capacity in the manner of a liner conference,
but without the obligation to adhere to conference tariffs and capacity levels.6
These practices are banned in the EU and fall within the same category of
Article 81 EC infringements as liner cartels.7
The major challenge for European competition law enforcers is to ensure
effective competition in the market, and to do so not by an outright prohibi-
tion of all forms of co-operation between carriers, but by preventing or penal-
ising conduct which is equivalent in its objects to a liner cartel or which may
have anti-competitive effects on the market. Although the European Court of
Justice has developed a substantial body of case law clarifying the application
of Article 81 EC both generally and in relation to liner shipping, there is con-
siderable uncertainty and tension about the way in which Article 81 EC will
apply to co-operation between liner shipping companies in the future, par-
ticularly from the carriers’ perspective.8 The Commission has attempted to
assist the industry by issuing its Guidelines on application of Article 81 EC to
maritime transport services. These are discussed in Section 2 below.
During the review of Regulation 4056/86, it became clear that, in future,
the focus of co-operation in liner shipping will shift to information exchange
agreements between carriers.
Competition policy traditionally treats with suspicion any horizontal co-
operation between competitors because of the potentially harmful market

4
According to data from the US Federal Maritime Commission, under 10% of TACA
conference cargo was carried according to the conference tariff. A major share of cargo was car-
ried under service contracts between carriers and shippers. See FMC, The Impact of Ocean
Shipping Reform Act of 1998, September 2001, available at http://www.fmc.gov/images/
pages/OSRA_Study.pdf.
5
Members of discussion agreements are not bound to specific rate levels, and are attracted
by the opportunity to exchange information and the ability to agree voluntarily on pricing
policy: see FMC Report (1998), op. cit., note 4.
6
See Case T-395/94 Atlantic Container Line AB and Others (TAA) [2002] ECR II-875,
[1997] 5 CMLR 181, for a description of a stabilisation (“tolerated outsider”) agreement and
an analysis of such agreements in relation to Article 81 EC.
7
See TAA, op. cit., note 6.
8
Case law on the application of Article 81 EC to liner shipping deals primarily with the
scope of the liner conference block exemption and Council Regulation 4056/86, but also anal-
yses the application of Article 81 EC to agreements not covered by the block exemption, and
Article 82 EC. See, e.g., Joined Cases C-395–396/96 P Compagnie Maritime Belge Transports
SA and Others v Commission (CEWAL) [2000] ECR I-1365 [2000], All ER (EC) 385; Case
T-86/95 Compagnie générale maritime and Others v Commission (FEFC) [2002] ECR II-1011;
Case T-395/94 (TAA), op. cit., note 6.
28 alla pozdnakova

outcomes, such as supra-competitive tariffs, restricted capacity and poor

quality of shipping services. Horizontal information exchanges between liner
shipping companies may infringe Article 81 EC if their object or effect is the
prevention, restriction or distortion of competition. However, information
sharing agreements may also be competition neutral, or even capable of pro-
ducing beneficial results, within the meaning of the third paragraph of Article
81 EC. The application of Article 81 EC to information sharing between liner
shipping companies is analysed in Section 3 below.
Liner consortia are block exempted co-operative arrangements between
liner shipping companies the purpose of which is the joint operation and sup-
ply of liner shipping services. Consortia have become increasingly important
to liner carriers over the past decade and are not generally objected to by trans-
port users. Section 4 assesses some aspects of liner consortia in the light of new
competition policy in the EU. This section focuses particularly on the impact
of co-operation within liner consortia on transparency of information and the
possible implications of such transparency for the consortia block exemption.
Having been deprived of the ability to agree on rates and capacity legiti-
mately, liner shipping companies may attempt to do so in more secretive ways.
The lack of a formal agreement does not prevent the application of Article 81
EC, which also catches “concerted practices” between undertakings which
restrict competition. In principle, Article 81 EC applies if there is simply a
“concurrence of wills” between carriers to implement the same market policy.9
However, where appropriate market conditions exist, liner shipping compa-
nies may be able to co-ordinate their market conduct in a way incompatible
with competition policy objectives without entering into an “agreement” or a
“concerted practice” within the meaning of Article 81 EC. Section 5 takes a
brief look at Article 82 EC, which offers an alternative means of addressing
uncompetitive joint practices by liner shipping companies. Section 6 offers
some concluding remarks.

II. Commission Guidelines on the Application of Article 1 of the

EC Treaty to Maritime Transport Services

Liner shipping companies entering into horizontal co-operation arrangements

must comply with the competition rules of the EC Treaty. This means, inter

9
Case T-41/96 Bayer AG v Commission [2000] ECR II-3383, [2001] All ER (EC) 1, [2001]
4 CMLR 4, para. 173, aff’d by ECJ in Joined Cases C-2 & 3/01 P Bundesverband der
Arzneimittel-Importereure EV and Commission v Bayer AG [2004] ECR I-23, [2004] All ER
(EC) 500, [2004] 4 CMLR 13. See also Pozdnakova, A., Liner Shipping and EU Competition
Law, Kluwer Law International, 2008, pp. 18–19.
 information exchange agreements between liner shipping companies 29

alia, that they must carry out self-assessment of their practices and compli-
ance with Article 81 EC. Article 81(3) EC, which lists criteria exempting
certain forms of co-operation from the prohibition laid down in Article 81(1)
EC, is directly applicable: the individual exemption procedure was repealed in
2004 and undertakings must now conduct self-assessment of the compliance
of their conduct with competition rules.10
In 2007, the Commission presented for public discussion its draft Guidelines
on the application of Article 81 of the EC Treaty to maritime transport services
(hereinafter the “Guidelines”). Having received significant feedback from the
industry, the Commission finalised the Guidelines, which were published on
1 July 2008.11 The Commission intends to apply the Guidelines for a period
of five years.12 The objective of the Guidelines is to “help undertakings and
associations of undertakings operating those services, mainly if operated to
and/or from a port or ports in the European Union, to assess whether their
agreements are compatible with Article 81 of the Treaty”.13
The Commission’s approach to some questions concerning the application
of the competition rules of the Treaty has already been clarified in other
notices, which may also be helpful in the context of shipping.14 The Guidelines
are without prejudice to the interpretation of Article 81 of the Treaty by the
European Court of Justice or Court of the First Instance.
The Guidelines are limited to horizontal co-operation in shipping and con-
tain definitions of maritime transport services and the relevant market, as well
as other factors which, in Commission’s view, should also be taken into
account when defining the relevant market in liner and tramp shipping. The
Guidelines discuss the application of Article 81 EC to exchanges of informa-
tion between liner shipping companies and to pool agreements in tramp
shipping.
The Guidelines only propose a general analytical framework and a starting
point for the analysis of co-operation between carriers. They do not provide
an exhaustive account of the application of Article 81 EC to maritime transport

10
Council Regulation 1/2003 on the implementation of the rules on competition laid down
in Articles 81 and 82 of the Treaty, OJ 2003 L1/1.
11
Guidelines on the application of Article 81 of the EC Treaty to maritime transport serv-
ices, SEC(2008)2151 final. Text of the final Guidelines and comments on the Draft Guidelines
are available at http://ec.europa.eu/comm/competition/antitrust/legislation/maritime.
12
Para. 8 of the Guidelines.
13
Para. 2 of the Guidelines.
14
See particularly Notice on the Definition of the Relevant Market for the Purposes of
Community Competition Law, OJ 1997 C 372/5; Guidelines on the applicability of Article 81
of the EC Treaty to horizontal co-operation agreements, OJ 2001 C 3/2; Notice on the
Agreements of Minor Importance (de Minimis), OJ 2001 C 368/13; Guidelines on the appli-
cation of Article 81(3) of the Treaty, OJ 2004 C 101/97; Guidelines on the effect on trade
concept contained in Articles 81 and 82 of the Treaty, OJ 2004 C 101/8.
30 alla pozdnakova

services. It is also clear that the Commission does not intend the Guidelines
to operate as a new exemption for the liner shipping sector. However, the
Commission acknowledges that co-operation between liner carriers which
infringes the first paragraph of Article 81 EC is not in principle deprived of
the protection of the third paragraph, provided the carriers can show that the
criteria for exemption are fulfilled.15

III. Information Exchange Agreements between

Liner Shipping Companies

Information exchange arrangements establish frameworks which allow under-

takings to exchange information amongst themselves or to set up common
agencies to centralise, compile and process information before returning it to
the participants in the form and at the frequency agreed.16 Trade associations
may also operate as fora for members to exchange and discuss market and
other relevant information.
In the course of the review of the liner conference block exemption, infor-
mation exchange agreements came under the Commission’s spotlight as rep-
resenting an alternative – but more competition friendly or even competition
neutral – means of protecting the reliability of liner shipping services. The
Commission and the European Court of Justice have considered the applica-
tion of Article 81 EC to information exchanges between competitors in sev-
eral cases. The liner shipping companies felt, however, that more clarification
was needed about the application of Article 81 EC to information sharing in
the context of liner shipping, and this is one of the topics covered by the
Guidelines.17
Liner shipping companies may be interested in obtaining information
about their competitors’ market positions and commercial operations, because
such knowledge helps them plan their own market strategies and assess their
market performance in relation to that of their competitors. Transparency of
information among competing undertakings does not per se threaten the com-
petitive functioning of the market. Horizontal information exchange agree-
ments between carriers have a less straightforwardly negative impact on
competition than liner cartels and are not harmful by definition.

15
Paras. 46 and 58 of the Guidelines.
16
For example, the European Liner Affairs’ Association (ELAA) proposed setting up a com-
mon structure for collecting and sharing information of a certain scope related to the liner
shipping market. The text of the ELAA proposal and the related discussion is available at http://
ec.europa.eu/comm/competition/antitrust/legislation/maritime.
17
Paras 38–59 of the Guidelines.
 information exchange agreements between liner shipping companies 31

The worst-case future scenario for the liner shipping market would be one
where information sharing by carriers effectively imposed the same hard-core
restrictions on competition as liner conferences. However, competition law
enforcers cannot automatically conclude that this would be the result, on the
basis of the horizontal nature of the exchange or of one single factor, such as
the type of information shared. Infringement of Article 81(1) EC in an indi-
vidual case of information exchange can be established only through the anal-
ysis of a complex range of factors. These factors concern the type and character
of the information, the structural conditions of the market, the level of detail
involved and the frequency of exchange.
Article 81(1) EC draws an important distinction between restriction of
competition by object and by effect. Once an information exchange agreement
is found to be restrictive “by object”, it is not necessary to investigate its anti-
competitive effects.18
According to the Guidelines, an exchange of information may, in itself,
have the object of restricting competition, although the Commission does not
suggest any specific types of exchange which would be restrictive by object,
and the Guidelines do not address such exchanges.19 Moreover, the Commission
has taken the view that even the sharing of information on tariffs, capacity
and similar “commercially sensitive” considerations is not sufficient per se to
categorise an arrangement as restrictive “by object”.20
In the Guidelines, the Commission emphasises the conceptual distinction
between, on the one hand, information sharing which is underpinned by a
concerted practice and, on the other, information sharing that requires inde-
pendent analysis under Article 81(1) EC. The former type of information
exchange will be assessed together with the concerted practice and is not rel-
evant to the Guidelines.21 In practice, however, most cases in which the
Commission and the courts have dealt with information sharing have also
involved anti-competitive concerted practices between undertakings.
A distinction must also be drawn between information sharing arrange-
ments of the type envisaged by the Commission as a legitimate alternative to
liner conferences and rate “discussion” agreements, which provide fora not only
for the sharing of data but also for the discussion of such data and agreement on

18
See, e.g., Joined Cases 56 & 58/64 Établissements Consten S.á.R.L. and Grundig-Verkaufs-
GmbH v Commission [1966] ECR 299, [1966] CMLR 418; Cases T-25/95 etc Cimenteries
CBR SA v Commission [2000] ECR II-491, [2000] 5 CMLR 204, para. 1531.
19
The Guidelines, para 42.
20
See para. 39 of the Guidelines. Previously the Commission appears to have taken a more
categorical approach to exchanges of price information; see note 27, infra.
21
As expressly stated in its para. 42.
32 alla pozdnakova

voluntary rate levels.22 Agreements on non-binding and recommended tariffs

automatically infringe Article 81(1) EC.23
What types of information exchange between liner shipping companies
risk being categorised as restrictive “by object”? Generally this category
includes serious restrictions which are highly likely to have negative effects on
competition, namely, increased (supra-competitive) rates, reduced shipping
capacity and misallocation of resources.24 Some of these restrictions – but
not information sharing – are expressly mentioned in the open list in
Article 81(1) EC. Indeed, the concept of restriction “by object” represents a
policy consideration which views certain agreements as “clearly inimical to
the objectives of Community”.25 However, information sharing is not an abso-
lute threat to competition: in competitive market conditions, transparency of
(even price) information only increases competition between undertakings.26
In this author’s opinion, it may, in individual cases, be possible to infer
from the nature of an information exchange arrangement as a whole and the
circumstances of its implementation that its object is the restriction of competi-
tion. Clearly, the type of information exchanged by liner shipping companies
will be important in this respect, but other factors should also be taken into
account, including the long history (in effect, the habit) of collusion in liner
shipping.27 However, exchanges of information between liner shipping com-
panies which are not obviously anti-competitive should not be placed within
this category.
The competition authorities and courts, as well as the industry itself, need
more experience of the functioning of the liner shipping market in the absence
of the conference block exemption. Further experience will make it possible to
identify which types of information sharing between liner shipping companies

22
See, e.g., United States/Australasia Discussion agreement, FMC No. 011117, Article 5(1)
of which provides, “The parties, or any of them, are authorized, but not required, to meet, collect
and exchange information […] and discuss and reach consensus or agreement upon uniform or
differential transportation Rates […]”, http://www.fmc.gov, under Section “Agreements
Library.”
23
See FENEX, OJ 1996 L 181/28, para. 70; Case No 8/72 Vereeniging van Cementhandelaren
v Commission [1972] ECR 977, [1973] CMLR 7.
24
See Guidelines on Article 81(3), op. cit. note 14, paras 21–23.
25
Whish, R., Competition Law, 5th Ed. London, LexisNexis, 2003, p. 112.
26
Cases C-7/95 P & C-8/95 P John Deere v. Commission [1998] ECR I-13111, [1998] 5
CMLR 311, para. 88; Guidelines, para. 44.
27
For some earlier Commission decisions in which it condemned the exchange of price
information and other information constituting business secrets see, e.g., Cobelpa/VNP, OJ
1977 L 242/10; Cartonboard, OJ 1994 L 243/1, aff’d by CFI with respect to the prohibition on
exchanging price information in Case T-317/94 Moritz J.Weig GmbH v. Commission [1998]
II-1235, paras 171–173.
 information exchange agreements between liner shipping companies 33

are particularly harmful for competition and which should be regarded as

restrictive “by object”.28
From the point of view of the parties to an information sharing arrange-
ment, it is far preferable for the arrangement to be found restrictive “by effect.”
Firstly, an extensive analysis of the arrangement’s effects on the market will
have to be conducted to establish whether it infringes Article 81(1) EC – this
cannot be assumed.29 Secondly, such an arrangement is more likely to fulfil
the conditions of Article 81(3) EC than one involving a restriction of compe-
tition “by object”.
Information exchange may have anti-competitive effects such as increased
market transparency, the facilitation of co-ordinated conduct between com-
peting carriers and the raising of barriers to entry. Information sharing agree-
ments between liner shipping companies may have further anti-competitive
effects, such as supra-competitive tariffs and decreased capacity.30
Such results would only follow from information sharing which, compared
to the situation in the absence of any such arrangement, would reduce the
competing carriers’ uncertainty about the operation of the market and enable
them to predict competitors’ future moves.31 Carriers would accordingly be
deprived of the incentive to compete autonomously, instead preferring to co-
ordinate pricing and other market policies. Transparency of certain “commer-
cially sensitive” types of information (business secrets) would be particularly
likely to enlighten carriers as to their competitors’ likely market strategies to
the detriment of competition.32 Such information would not only relate to
carriers’ actual and future pricing and capacity, but also to actual liftings of
cargo and levels of capacity utilisation, as well as costs and planned invest-
ments33 – there is no need to supply an exhaustive list here.
However, uncertainty concerning competitors’ future strategies is not likely
to be less in markets where there is a high degree of competition. In intensely
competitive markets, transparency regarding pricing and other similar infor-
mation will intensify competition, because competitors will not be encouraged

28
See Whish, R., op. cit., p. 115, who points out that the scope of the “by object” category
is “capable of change over a period of time, as the Community Courts are called on to consider,
or perhaps to reconsider, the restrictive nature of particular types of agreement”.
29
See, e.g., Case 23/67 Brasserie de Haecht v. Wilkin [1967] ECR 407, 415, [1968] CMLR
26, 40; Cases C-7/95 P & C-8/95 P John Deere v. Commission, op. cit., note 26, paras 76 and
91 respectively; Case C-234/89 Delimitis v. Henninger Bräu AG [1991] ECR I-935, [1992] 5
CMLR 210, para. 13; Case T-317/94 Moritz, op. cit., note 27, para. 172.
30
See Pozdnakova, A., op. cit., p. 70.
31
See, e.g., John Deere (ECJ), op. cit., note 26, para. 90. See also the Guidelines, para. 43.
32
John Deere (ECJ), op. cit., note 26, para. 90.
33
Europe Asia Trades Agreement (EATA), OJ 1999 L 193/23.
34 alla pozdnakova

to co-ordinate their market behaviour, but rather to undercut each other’s

prices and improve their services for the benefit of their customers. This is
especially so if the information is also transparent for customers. Objections
are not generally raised to exchanges of such “commercially sensitive” data in
highly competitive markets.34
The impact on competition of information sharing between liner shipping
companies should consequently be primarily assessed in the light of the struc-
tural conditions of the relevant market and the type and characteristics of the
information exchanged.
Few markets in the real world even approach perfect competition. Many
markets, including the liner shipping market, can rather be characterised as
oligopolistic: relatively concentrated on the supply side, with high barriers to
entry and multiple links between carriers.35 Such markets cannot be described
as highly competitive. Participants tend to co-ordinate tariff rates and capacity
rather than compete with each other. This makes it particularly important to
promote competition by preserving the remaining elements of uncertainty
and secrecy between competing operators.36 In John Deere, the ECJ concluded,
‘On a highly concentrated oligopolistic market, an agreement providing for an
information exchange system among the undertakings on that market reduces
or removes all uncertainty as to the operation of the market and is such as to
impair competition between traders if the information exchanged consists of
business secrets …, is disseminated systematically and at short intervals, and is
shared between the main suppliers, for their sole benefit, to the exclusion of
other suppliers and consumers’ (emphasis added)37
The criteria for determining what constitutes a “highly” concentrated
market – or, at least, a market with a sufficiently high degree of concentration
for the purposes of information-sharing analysis under Article 81(1) EC – can

34
See the Guidelines, para. 44.
35
There is some controversy among researchers as to the liner shipping market’s degree of
concentration, price transparency and other characteristics. The Commission has, in principle,
accepted that liner shipping markets are concentrated and oligopolistic: see, e.g., Information
Note: Issues raised in discussions with the carrier industry in relation to the forthcoming Commission
guidelines on the application of competition rules to maritime transport services (Consultative
Issues Paper on information exchanges in liner shipping), paras 23–42, available at DG
Competition website: http://ec.europa.eu/comm/competition, Section Maritime transport
under ‘Antitrust – Legislation’. See also Blanco, L.O., op. cit., pp. 473 et seq. who criticises the
Commission for being inconsistent in its evaluation of concentration in liner shipping (see
particularly note 362 at p. 473), but supports the view that, in general, the degree of concen-
tration in liner markets is very high.
36
However, some oligopolies do feature rather intense competition and, in practice, such an
oversimplified approach to oligopolistic structures is not sufficient. On oligopolies generally
see, e.g., Whish, R., op. cit., pp. 506 et seq.
37
John Deere (ECJ), op. cit., note 26.
 information exchange agreements between liner shipping companies 35

be established on the basis of existing competition case law, including cases

dealing with merger control.38
Generally, the less “commercially sensitive” the information, the less likely
it is that carriers’ exchanges of such information will infringe Article 81 EC.
Exchanges of historical, statistical or aggregate information, as opposed to indi-
vidualised information, are likely to produce negative competitive effects only
in specific structural circumstances. The actual or potential anti-competitive
effects of sharing information which does not relate to business secrets must
still be analysed in the context of the market structure in which a particular
exchange takes place. A “sliding scale” approach can be used to deal with non-
price-related information exchanges in liner shipping: the less competitive the
structural conditions of the relevant market, the more likely it is that the
shared information will be “commercially sensitive”.
In line with case law, the Commission accepts that, also in the case of liner
shipping, information may be discussed and exchanged within the context of
a trade association, provided the association does not provide a forum for
cartel meetings, issue anti-competitive instructions to its member carriers or
exchange information which may have anti-competitive effects.39 Discussions
of a legitimate nature may, for example, cover issues concerning technical and
environmental standards.40
Although data exchanged among carriers participating in such an arrange-
ment may appear, prima facie, to be competition neutral, the information and
the way it is (envisaged to be) exchanged may still prove to be “commercially
sensitive”. Accordingly the nature of the data needs to be more closely exam-
ined – it is not sufficient simply to look at the way in which participating
carriers categorise it. The actual contents and scope of exchanges must be
clearly identified. In particular, a system which provides a forum not only for
the exchange of purely historical data, but also for the discussion of such data
and the publication of forecasts of demand by trade and commodity, could
result in carriers aligning their current and future market behaviour.41
Furthermore, an examination of the relevant market’s structural conditions
will help establish whether exchanges of generally “safe” information may,

38
In John Deere, ibid., where the market was described as highly oligopolistic, the aggregate
market share of the four main suppliers amounted to 77.7% and their individual positions were
stable or increased: see paras 78–80 thereof.
39
Para. 59 of the Guidelines.
40
See “non-rate discussion” agreements between carriers operating on the US sea trades
available at the FMC website: http://www.fmc.gov, under “Agreements Library”.
41
These objections were lodged against the ELAA proposals in the course of Review
4056/86; see submissions in relation to the ELAA proposals at http://ec.europa.eu/comm/
competition, Section Maritime transport under ‘Antitrust – Legislation’.
36 alla pozdnakova

nevertheless, restrict competition. For example, if very few competitors operate

in a market, analysis of data supplied under an agreement to exchange statisti-
cal or aggregate information may still enable data relating to individual par-
ticipants to be identified. Similarly, while historical information is excepted
from Article 81(1) EC because it does not, as a rule, disclose future market
strategies, the exchange of such information will infringe this paragraph if it
enables competitors to forecast accurately future market conditions.42
In its Guidelines, the Commission specifically addresses aggregate capacity
information and price indices. In the Commission’s opinion, exchanges of
capacity forecasts even in aggregate form, especially when they take place in
concentrated markets, have a high potential for infringing Article 81(1) EC.
This is the case where exchanges of aggregate capacity forecasts, indicating in
which trades capacity will be deployed, lead to the adoption of a common
pricing policy by carriers and supra-competitive rates. Subsequent individual
announcements by liner carriers about capacity may enable recipients of the
aggregate capacity data to identify the market positions and strategies of com-
petitors in a way incompatible with Article 81(1) EC.43
The liner shipping industry uses price indices based on aggregate data to
show average price movements for the transport of a container by sea. For this
reason, and assuming the price information is appropriately aggregated and
cannot be traced to an individual carrier, price indices fall outside the scope of
Article 81(1) EC.44 If, however, a price index allows competitors’ data to be
directly or indirectly identified, thus removing or reducing uncertainty as to
their market policies, it will infringe Article 81(1) EC.
To fall foul of Article 81(1) EC, information exchange agreements must
also be capable of producing an appreciable adverse impact on certain param-
eters of competition. In addition, only information exchange agreements
which restrict competition within the common market and may have an effect
on trade between Member States infringe Article 81 EC.45
An information exchange arrangement between liner shipping companies
which infringes Article 81(1) EC may, of course, still be legitimate if it fulfils
the cumulative exemption criteria in Article 81(3) EC. The Commission notes
in this respect that even restrictive exchanges of information between carriers
may create such efficiencies as better planning of investments and more
efficient use of capacity.46

42
Para. 54 of the Guidelines.
43
See para. 53 of the Guidelines.
44
Guidelines, para. 57.
45
See corresponding Guidelines and Notices cited in footnote 14 above. For a discussion of
these criteria in the context of liner shipping see also Pozdnakova, A., op. cit., p. 86 et seq.
46
Para. 58 of the Guidelines.
 information exchange agreements between liner shipping companies 37

Apart from the conditions relating to the improvements produced by a

restrictive agreement, the passing on of benefits to consumers and the indis-
pensability of the envisaged restriction, it is necessary to prove that the arrange-
ment will not eliminate competition in the substantial part of the liner
shipping services.47
Information exchange agreements will probably excessively restrict
competition – and fail to meet this condition – if they reduce carriers’ uncer-
tainty with respect to competitors’ pricing and capacity strategies. Uniform
and binding tariff agreements of the liner conference type are not the only
way of eliminating price competition – co-operative systems which allow
carriers to adjust their pricing strategies more flexibly may have the same
effect.48
The ECJ has said that, although price competition is important (and should
not be eliminated), “it does not constitute the only effective form of competi-
tion or that to which absolute priority must in all circumstances be accorded”.49
In the case of liner shipping, however, greater importance should be attached
to price competition than to other parameters such as the quality of the ship-
ping service. The role of quality competition in liner shipping, and specifically
container shipping, is relatively limited, and is unlikely to offset disadvantages
brought about by increased price transparency.50

IV. Liner Consortia, Market Transparency and the Review

of Competition Regulation in Shipping

Liner consortia will retain their block exemption until 25 April 2010.51 The
block exemption allows liner consortia to co-operate extensively for the pur-
poses of providing joint shipping services, with the exception of capacity

47
The other criteria listed in Article 81(3) EC are excluded from the scope of the present
discussion.
48
See TAA, op. cit., note 6.
49
Case 26/76 Metro SB-Großmarkte GmbH & Co. KG v. Commission [1977] ECR 1875,
[1978] 2 CMLR 1, para. 21. General case law, however, puts heavy emphasis on the impor-
tance of price competition: Metro, op. cit., note 6, para. 21; TAA, op. cit., note 6, para. 161;
Case 6/72 Europemballage Corporation and Continental Can Co Inc. v. Commission [1973] ECR
215, [1973] CMLR 199, para. 24.
50
See Pozdnakova, A., op. cit., p. 143. In TAA, op. cit., note 6, para. 314, the CFI points to
the secondary importance of price competition in liner shipping, which was the result of the
homogeneous and completely substitutable nature of the services in the particular case. It must
be noted, however, that the TAA case concerned a horizontal price-fixing arrangement – a far
more serious restriction of competition than information sharing.
51
Commission Regulation 823/2000 on the application of Article 81(3) of the Treaty to
certain categories of agreements, decisions and concerted practices between liner shipping com-
panies (consortia), OJ 2000 L 100/24.
38 alla pozdnakova

freezes and price-fixing agreements.52 Liner consortia are generally viewed as

fulfilling the Article 81(3) EC criteria, although some provisions of the con-
sortia block exemption will require amendment once the liner conference sys-
tem has been abolished.
Members of liner consortia may exchange information to the extent that
this relates to, and is necessary for, the co-operative activities covered by the
corresponding block exemption.53 The scope of the consortia block exemption
indicates that the sharing of information on tariff rates is not allowed. This
was, however, previously permitted within the framework of liner conferences,
in which many consortia lines participated. As is explained below, even in the
absence of liner conferences, the liner shipping market may encounter com-
petition problems where other – even exempted – forms of horizontal co-
operation continue to exist between carriers.
Exchanges of commercially sensitive information are possible within the
terms of the consortia block exemption, which authorises agreements con-
cerning, inter alia, capacity adjustments, the use of computerised data exchange
systems and/or joint documentation systems, cargo, revenue or net revenue
pools, joint marketing structures and the issue of joint bills of lading.54 In
practice this means that consortia members may be sufficiently aware of each
other’s market strategies to take them into account in an uncompetitive way
when planning their own individual strategies.
The compatibility of consortia with Article 81(3) EC is ensured by a
number of conditions attached to the block exemption. Importantly, effective
competition must exist within consortia, and competition between consortia
and non-consortia lines must be effective.55 The text of the block exemption
does not expressly refer to information sharing, but, in the light of Article
81(3) EC and the requirement for effective competition, excessive informa-
tion sharing by a consortium’s members, as well as excessive information
transparency within and across a consortium, would, in principle, appear to
have negative implications for the applicability of the block exemption to that
consortium.
Competitive tension may be reduced among consortium members not only
by active information sharing, but simply because the competing carriers are

52
For more detail on the liner consortia block exemption see Pozdnakova, A., op. cit.,
pp. 199 et seq.
53
That is to say, the exchange must be of such a character that it cannot be dissociated from
the given consortium without undermining its purpose and must not impose disproportionate
and excessive restraints on the participants.
54
Article 3 of Commission Regulation 823/2000.
55
Articles 5, 6 and 8 of Regulation 823/2000 establish the conditions for the block exemp-
tion and are linked to conference membership. These provisions will apparently need to be
reviewed following the repeal of the liner conference block exemption.
 information exchange agreements between liner shipping companies 39

engaged in co-operation through the consortium, even if the situation falls

short of active co-ordination. The principal competition concern in this regard
is the facilitation of parallel conduct by carriers which, while falling short of
the concept of “agreement”, “decision” or “concerted practice” laid down in
Article 81(1) EC, is nonetheless uncompetitive.56 Such concerns relate not
only to consortia, but also to other arrangements such as bilateral and multi-
lateral space exchange agreements (not amounting to the joint operation of
shipping services) which may, moreover, extend across several routes and co-
operative structures in liner shipping.
Networks of liner joint ventures may emerge through the participation of one
or more of the parent companies in several consortia or other co-operative ar-
rangements. This may give rise to co-ordinated market behaviour which weak
ens competition between the consortia and the individual member carriers.57
Continued, albeit weaker, competition between liner shipping companies
participating in the block-exempted consortia is not necessarily incompatible
with Article 81(3) EC. However, the forthcoming review of the consortia
block exemption58 needs to address competition issues arising from informa-
tion transparency within a liner consortium and across several co-operative
arrangements between carriers and to consider the implications of such trans-
parency for the applicability of Article 81(3) EC to consortia.

V. Co-ordinated Conduct of Liner Shipping Companies and

Article 2 EC

It is traditional to deal with co-operation between undertakings by applying

Article 81 EC. In particular, liner shipping companies must comply with this
provision if they wish to set up information sharing structures, or merely
exchange information among themselves. However, Article 81 EC does not
provide an effective mechanism for preventing all types of co-ordinated con-
duct between competitors.
Notably, Article 81 EC does not apply to tacit collusion (tacit co-ordination)
between liner shipping companies which is not underpinned by an agreement
or concerted practice. Where such co-ordination exists, it may become
apparent from parallel pricing and other uniform conduct. Such factors may
be explained, however, by the economic and structural characteristics of the

56
See also the discussion in Section 5, infra.
57
See Bellamy, C., Child, G.D. & Roth, P.M., European Community Law of Competition,
5th ed. London, Sweet and Maxwell, 2001, p. 240; Pozdnakova, A., op. cit., pp. 172–173.
58
The Commission is to commence public consultations on a preliminary draft regulation
on the renewal of the block exemption Regulation for liner shipping consortia; see Press Release
IP/08/1063 of 1 July 2008.
40 alla pozdnakova

liner shipping market – they are not necessarily evidence of collusion in the
form of an agreement or a concerted practice between carriers. A sufficient
level of transparency of market information is, however, essential for such
parallel conduct. The market impact of tacit collusion may be as negative as
that of explicit collusion and as damaging for consumer welfare as an anti-
competitive agreement or concerted practice.59
Where carriers jointly engage in uncompetitive conduct falling outside the
scope of Article 81 EC, effective regulatory possibilities may be found in
Article 82 EC. The concept of a position of collective dominance is well estab-
lished in the case law and does not rule out the possibility that tacit collusion
may lead to several competitors having a common market position.60 However,
in the author’s view, the potential of Article 82 EC to tackle uncompetitive
conduct by actors in oligopolistic markets has not yet been fully realised.
Furthermore, the scope of Article 82 EC is not limited to exclusionary
behaviour by individually or collectively dominant liner shipping companies.
The article may also apply to a wide range of exploitative conduct by domi-
nant undertakings, including exploitative pricing where two basic conditions
are fulfilled: firstly, the market position of the companies involved must
amount to collective dominance; secondly, joint tariff rates charged by the
members of the collectively dominant group must be excessive and unfairly
high (not merely in excess of competitive levels). In United Brands, the ECJ
indicated that “charging a price which is excessive because it has no reasonable
relation to the economic value of the product supplied” may constitute abuse
of a dominant position.61 Artificially created capacity shortages, or inefficient
and unreliable shipping services, may also amount to exploitation.
The regulation of exploitative abuses under Article 82 EC needs to be fur-
ther clarified and developed in case law, but the concept of the applicability of
Article 82 EC to such conduct has been clearly acknowledged by the courts
and in the very wording of Article 82 EC.62

59
The competition policy approach to tacit collusion and to ways of regulating it (if regulation
is, indeed, necessary) is not straightforward. On oligopolies generally see, e.g., Whish, R., op. cit.,
pp. 506 et seq. On parallel conduct in liner shipping see Pozdnakova, A., op. cit., pp. 31–38.
60
CEWAL, op. cit., note 8; Case No T-102/96 Gencor Ltd v. Commission [1999] ECR II-753,
[1999] 4 CMLR 971, para. 276. Of course, the group of carriers must also hold a sufficiently
high aggregate market share if they are to be found to possess a dominant position. On the
collective dominant position in liner shipping, see Pozdnakova, A., ibid., pp. 271–291.
61
Case No. 27/76 United Brands v. Commission [1978] ECR 207, [1978] 1 CMLR 429,
para. 250.
62
See, e.g., United Brands, op. cit., note 61; Continental Can, op. cit, note 49, para.26; Joined
Case Nos T-191/98 and T-212/98 to T-214/98 Atlantic Container Line AB and Others v.
Commission (TACA) [2003] ECR II-3275, [2005] 4 CMLR 20, para. 1124. On exploitative
abuses in liner shipping see Pozdnakova, A., op. cit., pp. 297–335.
 information exchange agreements between liner shipping companies 41

VI. Concluding Remarks

The repeal of the liner conference block exemption is being perceived as a

major turning point in competition regulation, both for liner shipping and
for the maritime transport market generally. This perception is not wholly
accurate, as liner shipping companies were obliged to comply with competi-
tion rules prior to the withdrawal of the conference block exemption, with
respect both to co-operative conduct not covered by this exemption and to
Article 82 of the EC Treaty, which prohibits – without exception – the abuse
of a dominant market position. A considerable body of case law and decisions
by the Commission has also emerged clarifying the application of Articles 81
and 82. This will also apply to the liner shipping sector.
The process of reviewing Regulation 4056/86 showed that the Com-
mission is not the only body concerned about the development of effective
competition in shipping. Transport users have adopted a much more confi-
dent position vis-à-vis shipping service suppliers and will probably avail
themselves broadly of the enforcement possibilities envisaged under EU
competition law to claim, inter alia, damages for carriers’ breaches of com-
petition rules. In the meantime, the burden of ensuring compliance with
the competition rules of the Treaty lies with the liner shipping companies
themselves.
It is clear that price-fixing and similar arrangements between carriers –
including arrangements which are flexible and non-binding – will infringe
Article 81 EC. In principle, any co-operation of a hard-core nature between
carriers will be unwelcome in post-conference liner shipping markets. The
sharing of price information and business secrets by liner shipping compa-
nies is also very likely to breach Article 81 EC. Nevertheless, many issues
concerning information exchanges between liner shipping companies still
require clarification, and more experience is needed with regard to the
market impact of information sharing arrangements in liner shipping in the
context of both Article 81(1) EC and 81(3) EC. Co-operation within liner
consortia and the corresponding block exemption will have to be brought
into line with the new competition regime in the EU maritime trades follow-
ing the outlawing of liner conferences. One issue arising here is the implica-
tions of information transparency for the consortia block exemption and
for the applicability of Article 81(3) EC in general to this form of
co-operation.
Finally, competition law enforcers need to adopt a more assertive position
with respect to the application of Article 82 EC to prevent exploitative con-
duct directly harmful to consumers by collectively dominant groups of
carriers.
42 alla pozdnakova

Bibliography

Bellamy, C., G. D. Child, and P. M. Roth. European Community Law of Competition, 5th ed.
London: Sweet and Maxwell, 2001.
Blanco, L. O. Shipping Conferences under EC Antitrust Law. Criticism of a Legal Paradox, trans-
lated by A. Read. Oxford: Hart Publishing, 2007.
Federal Maritime Commission, The Impact of Ocean Shipping Reform Act of 1998, September
2001.
Herman, A. Shipping Conferences. Deventer: Kluwer Law and Taxation Publishers, 1983.
Marx, Jr., D. International Shipping Cartels: A Study of Industrial Self-Regulation by Shipping
Conferences. 2nd Ed. New York: Greenwood Press, 1969.
Pozdnakova, A. Liner Shipping and EU Competition Law, Alphen a/d Rijn: Kluwer Law
International, 2008.
Sletmo, G. K. & E. W. Williams, Jr. Liner Conferences in the Container Age: U.S. Policy at Sea.
New York: Macmillan, 1981.
Whish, R. Competition Law. 5th Ed. London: LexisNexis, 2003.
 E.U. AND U.S. COMPETITION LAWS COMPARED:
THE PARADIGM OF HORIZONTAL COOPERATION
IN MARITIME TRADE

Emmanuel P. Mastromanolis*

I. Introduction
II. Economic (and Political) Underpinnings of the EU and of the US Antitrust
legislation on Maritime Trade
1. The Phases of Maritime Trade
A. First Phase
B. Second Phase
2. The “Empty Core” Theory: Suitable for Maritime Trade?
III. The Competition Law System of Maritime Trade: From Tailor-Made Rules to
Self-Assessment
IV. The US Treatment of Cooperation between Carriers: From Airtight Regulation to
Minimised Governmental Intervention
V. The EU and US Systems Compared: Developments and Prospects

I. Introduction

The assessment of the importance and impact of two antitrust legal systems in
comparative perspective may not be disengaged from the overall economic
context underlying such systems. Almost thirty years ago, what was widely
accepted both in Europe and the United States as constituting the specific
features of maritime trade1 (overtonnage coupled with the ensuing necessity
of rationalising the arrangement of capacity; instability as to the quality, fre-
quency and reliability of maritime transport services which increased the
uncertainty and commercial risks of shippers, as well as sunk costs of carriers,
the recoupment of which could vary considerably in accordance with the lev-
els of competition; presence of carriers from less developed nations entitled to
protection under the UN Code of Conduct) justified a departure from
the application of the antitrust rules. In a parallel manner, both the EEC and

* Lecturer in Commercial Law, Faculty of Law, University of Athens.

1
The term “maritime trade” or “maritime transport”, in the sense of transportation of cargo
from a port or point of receipt to another port or point of destination for compensation, is
usually met in E.U. legislative texts, while the equivalent term “ocean shipping” is used by the
U.S. legislation. In this paper, they are used alternatively, regardless of the legislative context to
which they refer.
44 emmanuel p. mastromanolis

the United States introduced and applied specific competition legislation,

geared to the needs of maritime trade. Even conduct which would normally
fall within the wider area of the hard-core antitrust offences (e.g. price-fixing)
was, under certain conditions, immune from antitrust scrutiny, although,
under the US regime, unlike the EC legislation, market players were bound to
follow certain prescribed filing and authorisation standards before putting
their practices and tariffs into effect.
As the last decade was marked by a significant shift in the conditions under
which maritime trade is carried on (technological changes, new forms of
agreements and of services), it turned out that neither its cost structure nor
other parameters necessarily warranted a deviation from the general principles
of Competition Law. Initially the United States and fairly recently the
European Union have sought to “deregulate” this market, and therefore per-
mitted the evaluation of agreements and forms of conduct in line with the
competition rules which generally apply to all other markets. To what extent
are the European Union and the United States approaches similar, and in
what ways do they differ? What are the expected consequences of such differ-
ences, and to what degree will they signify a shift to the self-assessment of the
antitrust compatibility of trading practices to maritime carriers? This chapter
aims to provide some preliminary feedback on this issue, as well as to consider,
on the basis of experience gained from deregulation in markets displaying
characteristics which are similar to those of maritime trade, whether the legis-
lative changes are expected to bring about the intended effects, i.e. lower con-
tainer rates and enhanced service levels for shippers, or, quite to the contrary,
increased rates and reduced services.

II. Economic (and Political) Underpinnings of the EU and

of the US Antitrust Legislation on Maritime Trade

1. The Phases of Maritime Trade

The economic circumstances which prompted legislative developments in
both the E.U. and the U.S. may be classified in two phases, the one preceding
1998, when the U.S. Ocean Shipping Reform Act was enacted, and the one
following such enactment, since the Act, for the first time, reflected to a con-
siderable extent the market changes which had preceded it, and introduced a
much more “liberal” regime, at least in comparison with the Shipping Acts of
1916 and 1984, which were characterised by extensive regulatory intervention
from the Federal Maritime Commission. Eight years later, the E.U. authori-
ties acknowledged that the independent activities of liner conference mem-
bers had gained substantial ground, to the benefit of shippers, and therefore
 e.u. and u.s. competition laws compared 45

the exemption for rate fixing by liner conferences should not benefit from the
advantage of the block exemption of Regulation 4056/86.

A. First Phase
According to legal scholars and economists, the markets of maritime trade in
this first phase featured:
(a) overtonnage, i.e. excess capacity, due to the extensive investment in ships
by carriers during the course of the twentieth century;2 overtonnage in
turn caused not only intense competition between carriers, frequently
putting at risk their profitable operation, but also the segmentation of
shipments and lack of coordination between trade schedules, which pre-
vented the achievement of economies of scale and therefore the attain-
ment of lower operating costs;
(b) increased fixed costs of carriers, since the latter had to invest not only in
vessels, but also in ancillary facilities; in failing to recoup such costs, the
survival of many carriers could be jeopardized due to the vigorous rivalry
prevailing in the market;
(c) presence of carriers from countries at divergent stages of development; the
United Nations Convention on a Code of Conduct for Liner Conferences,
ratified at least by the European Community,3 mandated the protection of

2
See Nesterowisz, M.A., The Mid-Atlantic View of the Antitrust Regulations of Ocean
Shipping [2004–05] 17 USF MarLJ 45, 46 and Clott, C. & Wilson G., Ocean shipping
Deregulation and Maritime Ports: Lessons Learned from Airline Deregulation [1998–99] 26
TranspLJ 205, 209 (on the problem of uneven traffic flow of shipping lines and the chronic
overcapacity in many maritime trades, apparently tackled though the operation of liner
conferences).
3
By virtue of Council Regulation EC 954/79, published in O.J. L 121/1, 17.5.1979. The
complete text of the United Nations Code of Conduct has been published by UNCTAD as
Conference of Plenipotentiaries on a Code of Conduct for Liner Conferences (1975), vol. II.
More specifically, Article 2(4) of the Code stipulates that:
“When determining a share of trade within a pool of individual member lines and/or groups of
national shipping lines … the following principles regarding their right to participation in the
trade carried by the conference shall be observed, unless otherwise mutually agreed:

(a) The group of national shipping lines of each of the two countries the foreign trade between
which is carried by the conference shall have equal rights to participate in the freight and
volume of traffic generated by their mutual foreign trade and carried by the conference
(b) Third- country shipping lines, if any, shall have the right to acquire a significant part, such
as 20 per cent, in the freight and volume of traffic generated by that trade.”

Under such conditions, the concern to protect the carriers of less developed countries was to a
substantial extent accommodated. See also Blanco, L-O., Shipping conferences under EC anti-
trust law, 2007, 73–75. This monograph also includes an extensive critique of the main argu-
ments commonly used in favour of liner conferences, namely the “stability” argument and the
“adequacy and efficiency of services” argument. Ibid. at 312–352.
46 emmanuel p. mastromanolis

the interests of carriers from less developed countries, regardless of their

respective levels of efficient operation.
As a response to the aforementioned economic and political realities, legis-
lators in both the European Union and the United States took the stance that
the stabilization of maritime trade, the assurance of reliable services to ship-
pers and the adequate scheduling of transport services, along with the protec-
tion of smaller players in the market and the guaranteeing of their continued
operation despite the competitive pressures, could be achieved only if liner
conferences, i.e. associations of carriers acting in concert and setting a common
tariff as a return for their services, were protected from antitrust scrutiny.

B. Second Phase
In the second stage of evolution of ocean shipping, landmarked by the enact-
ment of new U.S. legislation in 1998, the market trends encompass:
(a) The containerization of cargo,4 which led directly to the shipping of cargo
in large volumes of a compact and homogeneous nature and indirectly to
the development of new kinds of vessels5 and state-of-the-art complemen-
tary (port) infrastructure (both of which lead to high operation costs),6 as
well as the introduction of sophisticated “just-in-time” logistics patterns,
decreasing the importance of the allocation of schedules (and, in some
cases, of ports); this new reality was a solution to the previous fragmenta-
tion of shipments that, in the past, had been used as a rationale for the
function of liner conferences. At the same time, besides quality and reli-
ability of service, containerization of cargo permitted the development of
scale economies and lower costs for carriers which in a competitive market
could be passed on as lower freight and rates to shippers.

4
See Monteiro, J. & Robertson, G., Shipping Conference Legislation in Canada, the European
Economic Community and the United States: Background, Emerging Developments, Trends
and a Few Major Issues [1998–99] 26 TranspLJ 141, 165. According to the authors, as of the
publication of their article, the total percentage of containerized cargo, in terms of value, rep-
resented 25% of the total maritime trade, while the pace of its increase in major selected ports
over a time span of two decades frequently amounted to over 3,000%. See also Selna, J.,
Containerization and Intermodal Service in Ocean Shipping (1969) 21 StanLRev 1077.
5
Because of the new vessel configurations, TEU capacity has increased over six times during
the last three decades. See Monteiro, J & Robertson, G., op. cit. at 167.
6
For instance, as intermodal transportation developed in both the European Union and the
United States, new high technology equipment (e.g. tri-level railcars, double-stack cars or lift-
ing equipment) was used as a necessary complement to vessels, while increased investment in
terminal and storage facilities at ports and intermodal facilities were liable to ultimately increase
operation costs for carriers and possibly restrict access to small-scale carriers. See Monteiro, J &
Robertson, G., op. cit. at 167, and Clott, C. & Wilson, G., op cit. at 215.
 e.u. and u.s. competition laws compared 47

(b) the organization of carriers along modified patterns and in larger scales, espe-
cially in consortia,7 the function of which mainly related to the pooling of
equipment and/or the joint use of infrastructure (mainly port facilities),
the development of common standards for maritime transportation serv-
ices and the coordination of schedules or ports of call.
(c) the conclusion of novel forms of agreement between carriers and shippers,8
such as space chartering agreements; such arrangements are used by carri-
ers to accommodate their customers’ requirement for rationalized serv-
ices, which permit shippers to plan in advance and lift the uncertainty
once inherent in maritime trade
(d) the provision of new types of services by carriers to shippers,9 for example
intermodal services (rail or car services combined with maritime trans-
portation) which enhance the reach of imported or exported goods at low
cost, given the scale at which they are undertaken.
From the above it may be concluded that the call for tackling excess capac-
ity, organising vessel space and safeguarding reasonable returns for all carriers
(efficient or not) during the first phase of the evolution of maritime trade
could be addressed only through the enactment and application of legislation
of a “dirigiste” and interventionist nature. Subject to the doubts cast on the
theory of “empty core” briefly set out below, market forces would be left free,
and some players would survive, while others less efficient would be driven
out of the market. At the same time, the arrangement of vessel space necessi-
tated coordination between carriers, in an effort to achieve a scale which could
not be achieved via the technology available at the time. By contrast, the sec-
ond stage of evolution of maritime trade indicates that, through the use of the
equipment, infrastructure and technological resources now available, the
desirable scale may be achieved: space arrangement is easier, cost of service is

7
Both the subject matter and the size of organization have changed; in fact, consortia usu-
ally comprise members of a number of conferences, while they aim at the rationalization of
services via technical and operation arrangements, rather than at tariff fixing, like liner confer-
ences themselves. See Monteiro, J. & Robertson, G., op. cit. at 169. According to the authors,
as of the publication of their article, the top five consortium alliances held market shares of
78%-80%.
8
For instance, the purpose of space chartering agreements is to allow the optimal use of
vessel space in a given trade. Other forms of agreement include discussion agreements which
serve to exchange views on market trends and developments, while stabilization agreements
have as their object the reduction of capacity, with a view to ensuring adequate rates and higher
profits for carriers. See Monteiro, J. & Robertson, G., op. cit. at 171. In contrast to space charter-
ing arrangements, discussion and stabilization agreements may result in the exchange of sensi-
tive information between contractual parties, or may reduce output, and thus may hamper
competition in ocean shipping. See also Clarke, R., An Analysis of the International Ocean
Shipping Conference System [1997] 36 TranspLJ 17, 17–19.
9
See Monteiro, J. & Robertson, G., op. cit. at 173.
48 emmanuel p. mastromanolis

lower, while the use of computerized systems may facilitate the coordination
of schedules and shipments, and thus quality of service to shippers may be
enhanced. The significance of regulatory interventions has hence decreased
and (even a supervised) co-operation between players may be limited only to
the extent necessary to attain the desirable scale and scope or assumption of
risky investments. Assuming that, at a Competition Law level, this translates
into deregulation, market forces will be left free and carriers will be exposed to
the risks of international competition. As the need for investments and the
provision of sophisticated services grows, however, only those carriers who are
able to compete on the merits and on the basis of efficiency will survive.
Technological advances, scale and scope will inevitably permit operations by
the fittest ones, and may bring about a wave of concentration, as has been the
case in the past with other unregulated markets in which conduct such as
horizontal price-fixing has been exempted.

2. The “Empty Core” Theory: Suitable for Maritime Trade?

Especially during the first phase of development of maritime trade, shipown-
ers themselves sought to ground the need for special treatment for liner con-
ferences and other forms of co-operation in this trade on the special attributes
of such trade, as well as on academic theories (most notably the theory of the
“empty core”) applicable to it and to similar markets.10 In particular, “empty
cores” are considered to exist in markets which have such attributes as uncer-
tain demand, increased supply costs, fixed firm capacities which are large rela-
tive to demand, and products or supplies which may not be stored at low
cost.11 It therefore appears that the theory prima facie applies also in the
context of maritime trade, which, as stated above, is characterized by high

10
The theory of the “empty core” is a variant of the theory of destructive competition and
was first developed by Lester Telser. A core exists in markets in which a set of transactions may
make players better off, thereby producing a long-run equilibrium price; by contrast, in mar-
kets with an empty core, as allegedly also in the market of maritime trade, such equilibrium
may not be achieved, since profitable pricing will only contribute to the attraction of new
entrants, which will ultimately undermine existing players who will consequently suffer losses.
See Telser, L., Competition and the Core [1996] 104 J Pol & Econ 85, idem., The Usefulness
of Core Theory in Economics [1994] 8 J Econ Persp 151, Wiley, J., Antitrust and the Core
Theory [1987] 54 U Ch L Rev 556, 565. More particularly, on the application of the theory in
the context of maritime trade, see Pirrong, S., An Application of Core Theory to the Analysis of
Ocean Shipping Markets [1992] 35 J Law & Econ 89, Sjostrom, W., Antitrust Immunity for
Shipping Conferences: An Empty Core Approach [1993] Antitrust Bull 419, idem., Liner ship-
ping: modeling competition and collusion in Grammenos, C. (ed.), Handbook of maritime
economics and business, 2002, 307.
11
See Sagers, C., The Demise of Regulation in Ocean Shipping: A Study in the Evolution of
Competition Policy and the Predictive Power of Microeconomics [2006] 39 Vand J Transnat L
779, footnote 119 and accompanying text.
 e.u. and u.s. competition laws compared 49

fixed costs and fluctuating demand. In addition, the following characteristics

inherent in maritime trade also support the application of the theory of the
“empty core”:
(a) the properties of the vessel, as the smallest available [smaller of which two?]
unit of production, having considerable fixed capacity, which may not be
stored unless used in a trade, and otherwise becoming idle capacity12
(b) the frequency of liner maritime trade, to which shipowners are commit-
ted vis-à-vis users, increasing the prospects for unused capacity on vessels
(c) finally, the losses experienced by shipowners in respect of capacity that
remains unused, prompting them to offer such capacity at unreasonably
low prices
To tackle the problem of unused capacity and ruinous competition by rea-
son of excessively low prices which would drive a number of players out of the
market, the available alternatives included the monitoring of freight rates
by a state supervising authority, or, in the alternative, self-regulation by the
shipowners without any public intervention whatsoever; another alternative
would finally be self-regulation along the lines prescribed in legislation. While,
as will be seen later, the first alternative was endorsed by the initial US legisla-
tion (namely, the Shipping Act 1916), the third was followed in the context
of both EC Regulation 4056/86 and recently by the US Ocean Shipping
Reform Act 1998.13 The second solution has not been followed on either side
of the Atlantic, due to the evident risks for competition which may arise as
a result of private anti-competitive initiatives of competitors in maritime
trade.14
It may be argued, however, that the application of the theory of the “empty
core” in the context of maritime trade may nevertheless be criticized, mainly
on three counts:
(a) on the extent of sunk costs required in the maritime trade: sunk costs incurred
by shipowners are not of such a scale as to justify their conduct gaining
immunity from antitrust laws, or at least differentiated treatment; it is to
be noted that the costs of the acquisition and maintenance of vessels may
be recouped in various interchangeable trades, in response to demand,
while one unprofitable trade may be substituted for another, in which one
or more vessels are to be used, so that unused capacity is avoided.

12
Blanco, L-O., op. cit. at pages 304, 305.
13
See Bayer, N., Antitrust Comes to Maritime Transport in the European Economic
Community [1987] 34 Fed B News & J 299, 300 (with a comparison between the principles
and rules of the Shipping Act 1984 with the then newly enacted EC Regulation 4056/86).
14
See Jack, R.B., Self-Policing of Ocean Shipping Conferences [1968] 20 StanLRev 724.
50 emmanuel p. mastromanolis

(b) on the adverse side effects brought about by liner conferences: increase of
overcapacity and the protection of the least efficient shipowners. More
particularly, liner conferences have been blamed for creating overcapacity
instead of rationalizing the capacity which already exists; unwilling or
unable to compete in terms of freight rates, liner conference members
embark on a service-oriented rivalry which occasionally takes the form of
investments in more vessels to achieve enhanced trade frequency. This is
also an effective barrier to entry for new players, which may be discour-
aged from entering the market due to excessive reserve capacity. On the
other hand, conferences usually permit the survival of the least efficient
members, i.e. those which are not capable of competing on the merits on
the basis of freight rates and take advantage of the shield of regulated or
fixed rates, as the case may be.
(c) on the lack of alternatives to conferences as mechanisms of coping with over-
capacity: the problem of insufficient demand may also be tackled over a
substantial period of time by means of long-term service contracts, which
not only guarantee efficiency, reliability and frequency of service to users,
but also permit balanced use of the available capacity of shipowners.15
All in all, the focal point of the “empty core” theory regarding destructive
competition which should be avoided due to the particular attributes of mari-
time trade was finally undermined by a fresher analysis of the market, espe-
cially in view of the latest developments, as well as the adverse effects which
protected conferences were found to bring about. In essence, what was ini-
tially thought to be destructive competition, was in reality a “healthy” process
of forced exit, inherent in unfettered rivalry in maritime trade, and also in
other markets.16

III. The Competition Law System of Maritime Trade: From

Tailor-Made Rules to Self-Assessment

In 1986, the Council of the European Communities, declaring the need for
specific competition rules in the market for maritime trade, adopted Regulation

15
Blanco, L-O., op. cit. at pages 306, 307, 328.
16
See Sagers, C., op. cit. at 785 and 813–814 (the fact that the harmful effects of liner confer-
ences under the regime existing prior to the Shipping Act 1984 and the OSRA were usually not
followed by either price-cutting by one or more of the conference members, or even by new
entry may be attributed to the fact that conference members had no right of independent
action, while terms and conditions departing from those already filed and approved by the
Federal Maritime Commission could be easily detected and disciplined by conferences). Seeds
of the “empty core” theory may also be traced in the report of the so-called “Alexander”
Congressional Committee preceding the enactment of Shipping Act 1914, as it stated that,
 e.u. and u.s. competition laws compared 51

4056/86;17 while, in its Preamble, it was stated that its purpose was to strike a
balance between the application of the general competition law provisions of
the EC Treaty and excessive regulation, its scope seemed to point in the oppo-
site direction. In fact, only tramp vessel services were excluded from its scope,18
i.e. the part of the maritime transportation market the conditions of which
were dictated purely by market forces, rather than by the frequency and the
stability of services, and therefore were formulated following the individual
negotiations of contractual parties. Given the one-off and unorganized nature
of those services, it was considered that there was no need for EC legislation
to intervene in order to safeguard the survival of carriers involved in this type
of trade, nor the frequency and reliability of such services. Otherwise, how-
ever, it was acknowledged that tramp vessel services provide a significant check
on the anti-competitive conduct of liner conferences, and, under certain cir-
cumstances, may be a viable alternative available to shippers.19
Regulation 4056/86 in reality reflected a much-desired protectionism vis-à-
vis shipowners and carriers, since frequency of trade and stability of freight
have been used as powerful arguments to curb competition among members
of conferences. The enactment of the Regulation came as no surprise to the
market, since it was due not only to the strong lobbying exerted by the ship-
owners, but also to the fragmentation of the demand of shippers, who did not
have sufficient countervailing leverage or organization either to delimit the
aspirations of the shipowers or to influence the competent authorities in
favour of their interests.20
More particularly, in brief, the provisions of Regulation 4056/86 treated
agreements between carriers in a two-fold manner, according to their subject
matter. For technical and cooperation agreements, it was stated that Article 85
para. 1 of the EC Treaty did not apply, and so there was no need for exemp-
tion under the third paragraph of that same Article. In fact, these agreements

with competition, “lines would either engage in rate wars which would mean the elimination
of the weak and survival of the strong, or to avoid a costly struggle they would consolidate
through common ownership”. See Report on Steamship Agreements and Affiliations in the
American Foreign and Domestic Trade, 63 Cong (1914) vol. 4 at 101.
17
Council Regulation (EEC) 4056/86, OJ L 378/4, 31.21.1986. For a brief and concise
overview of the history and current status of E.U. competition rules in the field of maritime
trade, see Bellamy & Child, European Community Law of Competition, 6th edn. 2007, 1080–
1090. See also Zekos, G., The Implementation of E.U. Competition Policy and its Rules in Air
and Maritime Transport [1998] 19 ECLR 430.
18
Article 1 para. 3(a) of the Regulation defines tramp vessel services on the basis of a single
voyage or time charter, which, unlike liner services, are neither regularly scheduled nor
advertised.
19
See the Preamble to the Regulation, in which the role of tramp services and other modes
of transport as a source of competition to liner conferences is being emphasized.
20
Blanco, L-O., op. cit. at 573.
52 emmanuel p. mastromanolis

aimed at the setting of uniform standards in connection with vessels, equip-

ment, installations or tariffs, and thereby contributed to the improvement
of services and transparency, without, however, restricting or distorting
competition between carriers.21 Alternatively, they had the object of pooling
vessels, facilities and resources to reflect the transport needs of individual ship-
pers and to achieve lower costs.22 Enhanced and coordinated services were also
being guaranteed through cooperation in connecting or successive routes.23
(Non-technical) agreements between liner conferences, on the other hand,
had as their object the fixing of rates and conditions of transportation which
should be made available on request to transport users24 or the coordination
of schedules, determination of frequency of sailings or allocation of sailings,
the regulation of capacity and the allocation of cargo and revenues between
members of the liner conference, therefore restricted competition between
such members or altered the patterns of the competition that would have
developed in their absence.25
The application of the block exemption for the aforementioned type of
non-technical agreements was subject to a condition and to a series of obliga-
tions to be respected by liner conference members. First, the liner conference
would not use its collective power to discriminate between shippers, ports of
origin or destination without a viable economic justification.26 It is notewor-
thy, however, that the Regulation did not subject the application of the block
exemption on what would otherwise be considered as a very serious antitrust
offence (price-fixing and market allocation) to a market share filter or to other
economic considerations pertaining to the collective power of liner confer-
ences and the presence of other sources of competition for users; instead, it
was presumed that, in most cases, there is in fact effective competition stem-
ming from non-conference scheduled services.27 Secondly, according to the
Regulation, loyalty rebates tying the transportation requirements of a given

21
See, e.g., Article 2 of the Regulation (a) and (f ).
22
See, e.g., Article 2 of the Regulation (b) and (e). However, the Regulation seems to have
applied a far-fetched rule of reason standard, without regard to the state of competition and the
market share of particular liner conferences, or to the benefits for shippers to whom lower costs
could be passed on.
23
See, e.g., Article 2 of the Regulation (c) and (d).
24
Article 5 para. 4 of the Regulation.
25
Article 3 of the Regulation.
26
Article 4 of the Regulation.
27
Of course, according to Article 7 para. 2 (a) and (b), the benefit of the block exemption
may be withdrawn by the Commission, where, acting on its own initiative or following a com-
plaint, it concluded that there was an absence or elimination of actual or potential competition
in the market. Article 8 also prevented the abuse of a (collective) dominant position by a liner
conference.
 e.u. and u.s. competition laws compared 53

shipper with a single conference for a specific period of time in exchange for
reduced rates, freight and commission should not result in abuse of the inter-
ests of users;28 also, the users should not be faced with tie-ins of water trans-
portation with unrelated services (e.g. inland transport, quayside services, etc)
which the conference also offered, and should instead be free to select the
provider of those services at their discretion.29 Both those obligations of the
conference to refrain from abusive loyalty-inducing and tie-in conduct aimed
at preventing the exclusion of competing non-members of the conference,
as well as to discourage the extension of market power from the maritime
transportation market to other connected or ancillary markets. Finally, the
Regulation introduced a simplified non-opposition procedure, in line with
which agreements notified on an individual basis were considered to be
exempted under Article 81(3), following the expiry of a ninety-day cooling-
off period, within which the Commission had not raised doubt as to their
antitrust compatibility.
Following the entry into force of Regulation 1/2003 on 1 May 2004, this
procedure may no longer be applied, since agreements need not be notified in
order to be granted an exemption; instead, contractual parties are responsible
for making their own self assessment before implementing their agreements,
so the risk of antitrust compatibility falls on them.30 On the substantive side,
Council Regulation 1419/2006 repealed provisions 1–9 of Regulation 4056,31
granting a transitional period until 18 October 2008, when even liner confer-
ences satisfying the criteria of Regulation 4056/86 will be assessed in line with
the new regime. According to Regulation 1419, the characteristics once con-
sidered to be peculiar to liner shipping and warranting the granting of a block
exemption were rejected. Therefore agreements between members of a liner
conference and agreements regarding tramp services and cabotage now fall to

28
Article 5 para. 1 of the Regulation. To safeguard the reasonable disengagement of users
from exclusive dealing arrangements with a liner conference, it was provided that the period for
which users are bound, both in the case of immediate rebates and in the case of deferred rebates,
may not be longer than six months. The Regulation also introduced minor exceptions to pro-
tect users in this respect, to the effect that the conference could not impose a loyalty arrange-
ment for the totality of the user’s requirements, while the latter could have recourse to alternative
carriers, for areas of origin or destination not advertised by the conference, or if the waiting
time at a port was longer than expected by users.
29
Article 5 para. 3 of the Regulation.
30
See Article 1, para. 2 of Regulation 1/2003 on the implementation of the rules of compe-
tition laid down in Articles 81 and 82 of the Treaty, OJ L1/1, 4.1.2003: “Agreements, decisions
and concerted practices caught by Article 81(1) of the Treaty which satisfy the conditions of
Article 81(3) of the Treaty shall not be prohibited, no prior decision to that effect being
required.”
31
Council Regulation 1419/2006,OJ L269/1, 28.9.2006, Article 1. See also Rosa Greaves,
EC Maritime Transport Law and Policy [2007] 56 ICLQ 415.
54 emmanuel p. mastromanolis

be assessed according to the general competition rules of the EC Treaty.32 In

essence, containerization and individual service agreements set the pace for
maritime trade, while shippers are no longer dependent upon the conferences.
Last but not least, in a very clear policy statement, the Preamble to Regulation
1419 stipulates that, in the wake of new modes of satisfaction of users’ needs,
the common setting of transportation rates by conferences only serves the sur-
vival of their least efficient members. This statement encapsulates the new pre-
vailing philosophy behind the repeal of Regulation 4056: deregulation,
survival of the most efficient (low-cost) carriers, finally, provision of enhanced
quality services at tariffs negotiated and agreed upon on an individual basis,
and lasting for a predetermined period to guarantee stability as well as permit
advance planning for shippers.33 This philosophy has also to be viewed against
the approaches of the EU judicature, which has occasionally questioned the
specificity of the market in maritime trade, allegedly necessitating a different
antitrust treatment from other industries.34
On the other hand, consortia, i.e. agreements between carriers having as
their principal object the joint operation of a maritime transportation service
with a view to enhancing its quality or rationalizing its provision are still
exempt under the conditions set out in Regulation 823/2000, as amended.35
Unlike liner conferences, consortia do not aim at the fixing of rates, and their
subject matter to some extent overlaps with some of technical agreements
tackled by Article 2 of Regulation 4056. Article 3 of Regulation 823/2000
introduces a block exemption for consortia the activities of which mainly

32
In a nutshell, it was considered that efficiencies (reliable scheduling and services) were no
longer achieved by liner conferences, since their operations had been significantly overtaken by
individual service agreements negotiated and concluded outside the general framework of the
conferences. Therefore the first criterion of Article 81 para. 3 was not satisfied; consumers in
turn did not seem to obtain any fair share of a benefit in the form of lower rates, charges and
commissions, especially given the hard-core nature of price-fixing and capacity allocation
contemplated by Regulation 4056/86; reliability of services was deemed to be achieved in the
context of more lax organizations (i.e. by less restrictive means) than liner conferences, for
instance by consortia; finally, the fourth criterion of Article 81 para. 3 of the EC Treaty was not
met, given the lack of external competition to conferences, especially at a price level and in
connection with surcharges and charges for ancillary services.
33
The repeal of Regulation 4056/86, although a more drastic measure, was finally preferred
to its mere review or amendment, due to its exceptional nature and its sharp contrast with the
competition protection principles enshrined in the EC Treaty. Blanco, L-O., op. cit. at 570,
571.
34
See, e.g. Case 167/73 Commission v French Republic [1974] ECR 359, Cases C-209 to
213/84 Ministère Publique v Lucas Asjes and Others [1986] ECR 1425, and Case 66/86 Ahmed
Saeed Flugreisen amd Silver Line Reisebüro GmbH v. Zentrale zur Bekämpfung unlauteren
Wettbewerbs e.V. [1989] ECR 1517.
35
Commission Regulation (EC) 823/2000, OJ L 100/24, 20.4.2000, as subsequently
amended by Commission Regulation 463/2004, OJ L 77/23, 13.3.2004, and Commission
Regulation 611/2005, OJ L 101/10, 21.4. 2005.
 e.u. and u.s. competition laws compared 55

relate to the pooling of resources and infrastructure.36 Some of their other

activities still relate to the coordination of time schedules or ports of call or the
pooling of cargo, revenue or net revenue, in principle unlike the allocation of
cargo or revenue provided for by Regulation 4056. Nevertheless the coordina-
tion of consortium members which is inherent in the pooling of cargo, reve-
nue or net revenue may indirectly bring about such allocation.37 As under
Regulation 4056, the right of withdrawal of each consortium member is safe-
guarded, upon its giving notice, the length of which is specified according to
the seriousness and extent of investments of the consortium and ranges
from eighteen to thirty months.38 Discriminatory tactics by the consortium
also prevent it being eligible for exemption under Regulation. But the
most important divergence between Regulations 823 and 4056 lies in the fact
that the applicability (rather than the withdrawal) of the block exemption of
the former depends on the analysis of the market, namely the market share
of the consortium in a given maritime trade, as well as the level of price and
service competition existing between consortium members and third parties.39
There is therefore economic realism in Regulation 823, in that access to alter-
natives for users of maritime transportation services is being safeguarded.
Also, unlike Regulation 4056, the Regulation on consortia takes into account
the recent developments in maritime trade, namely the decline of confer-
ences and the concurrent rise of individual service contracts, tailored to the
needs and quality requirements of shippers.40 Finally, to reflect potential new

36
For instance, the pooling of vessels, spaces and port installations, the use of joint opera-
tions offices and joint documentation systems, the joint operation of port terminals and ancil-
lary services (Article 2 para. 2 (a) ii, iii, iv, vi (b) and (c) are similar in nature to the technical
agreements referred to in Article 2 (b) and (e) of Regulation 4056. However, inlike Regulation
4056, which exempted the regulation of carrying capacity offered by each member of a liner
conference, Regulation 823 permits only temporary capacity adjustments which are not
tantamount to a capacity allocation, and their purpose is to consolidate consignments, attain
economies of scale or regulate transitory excess capacity. Likewise, the non-utilisation of capac-
ity is not covered by the exemption.
37
For instance see Article 2 (a) i and (d) of Regulation 823, which are similar to arrange-
ments under Article 3 (a), (c) and (e) of Regulation 4056.
38
Apparently, high investments require the continued participation of consortium mem-
bers, without which they may not be financed; the thirty month notice period contemplated in
such cases shall permit the undertaking of suitable measures necessitating the withdrawal of a
member (affiliation with a substitute member, etc). Regulation 611/2005, on the other hand,
provides for even longer notice periods of 24 months and 36 months (in the case of high invest-
ments) calculated from the date of entry into force of the consortium agreement, if this is
antecedent to the commencement of the joint consortium service.
39
The consortium must possess a market share of less than 35% by reference to the volume
of goods carried, or less than 30% if the consortium operates within a conference until 1
October 2008, when the transitional period of continued application of 4056 will expire
(Articles 5 and 6 of Regulation 823).
40
Article 2(3) of Regulation 823/2000 and Article 1 para. 2 of Regulation 611/2005,
amending Regulation 823/2000.
56 emmanuel p. mastromanolis

developments in the maritime trade market, the applicability of Regulation

823 has been extended until 25 April 2010. At that date, the EU authorities
will reconsider the situation and may perhaps decide on a further deregulation
of the market.
To facilitate the parties’ self-assessment of agreements not falling within the
scope of the block exemption of Regulation 823, the Commission issued
Guidelines in September 2007 (hereinafter “the Guidelines”).41 Although the
Guidelines are not binding, but rather of instructive value for parties wishing
to analyse ex post the antitrust compatibility of their practices, or to foresee ex
ante the reactions of the competition authorities to their prospective arrange-
ments, they include a systematic and market-oriented overview of the prac-
tices or conduct which may be adopted by carriers, especially after the repeal
of Regulation 4056.42 Not only do the Guidelines spell out a definition of the
relevant markets of maritime transportation, especially in view of recent com-
mercial developments in the area (e.g. containerization, development of serv-
ice contracts, which may also take the form of a time charter contract, etc),
but they also categorize arrangements and comment on their compatibility
with the first paragraph of Article 81 and the prospects for the application
of the third paragraph of the same Article, in the event that an arrangement
may restrict or distort competition and also have an adverse impact on
intra-Community trade.
On the (service) market definition front, the Guidelines distinguish between
liner shipping, on the one hand, and tramp services on the other. This distinc-
tion is grounded mainly on the regularity of transportation, based on specific
timetables and sailing dates, announced and advertised to the public, while
tramp transportation is undertaken on non-regular schedules and non-
advertised sailings.43
Therefore, although this is not explicitly stated, it is assumed that the two
types of services are not interchangeable and therefore tramp services do not
provide, at least in a generalized manner, a viable alternative for shippers.
Although this is partly true, it has also been acknowledged by the Community
legislation that there is increasing interchangeability between liner shipping
and tramp services, to the extent that the latter are available at a given time,

41
Guidelines on the application of Article 81 of the EC Treaty to maritime transport
services, OJ C 215/03, 14.9. 2007.
42
This is not to say that the Guidelines on Horizontal Cooperation or the Guidelines on the
application of Article 81(3) do not apply to maritime transportation; instead, the Guidelines
apply in a complementary manner, taking into account the idiosyncrasies of maritime trade.
Point 5 of the Guidelines.
43
Point 10 of the Guidelines.
 e.u. and u.s. competition laws compared 57

for a particular type of cargo and with the use of a specific type of vessel.44 The
Guidelines also state that tramp services not only may be covered by a time
charter agreement, therefore guaranteeing transportation to a shipper for a
given period and according to its specifications, but also are advantageous to
carriers from a cost point of view, in the sense that only “unscheduled transport
of one single commodity fills the vessel”.45 Generally, however, the Guidelines
state that demand-side as well as supply side substitutability for the purposes
of the definition of the relevant (tramp transportation) market be specified on
a case-by-case basis, according to a series of criteria, including the type of ves-
sel used, the nature of service provided or sought, the type of cargo to be
transported, and the standards of operation of a particular carrier (in terms of
safety, reliability, satisfaction of regulatory requirements, etc).46 Hand in hand
with the use of economic analysis introduced in Regulation 823, the Guidelines
set the economic background surrounding each agreement between carriers as
a prerequisite for the assessment of its compatibility with the EU Competition
rules.47
As for horizontal agreements, they are categorized by the Guidelines in the
following groups:
(a) technical agreements, which are given a narrower sense than under
Regulation 4056 (they are mostly geared to standardization and coopera-
tion, rather than pooling, for the attainment of superior technical results)
and are deemed to fall outside the ambit of Article 85 para.1.48
(b) information exchange agreements: sometimes incidental or ancillary to other
agreements which may be pro-competitive, for instance agreements for the
use of joint documentation systems, or coordination for the fixing of time-
tables (which may nevertheless indirectly lead to the regulation or alloca-
tion of capacity between the contractual parties), or the pooling of vessels
(which may however result in the commonality of costs between parties),
these agreements may be compatible with the competition rules, depending

44
See supra, footnote 12.
45
Point 10 of the Guidelines.
46
Points 20–27 of the Guidelines.
47
The same holds true in connection with the multi-level, actual and dynamic parameters
used for the calculation of market shares of parties to an agreement, namely their overall capac-
ity (used and unused), the conclusion of charter contracts (to measure the percentage of the
market which is covered by the parties on a medium- to long-term basis), their number of voy-
ages (to measure frequency of the parties’ operations in relation to their competitors) and the
value and volume of cargo transported (to measure the percentage of the shippers’ requirements
served by a particular carrier, and therefore, the latter’s coverage of the market). Points 31 and
32 of the Regulation.
48
Point 35 of the Guidelines.
58 emmanuel p. mastromanolis

on the structure of the market (concentrated or non-concentrated), the

sensitivity of the information exchanged (i.e. references to costs, prices and
capacities), the individual or aggregate, historic or recent character of this
information, as well as the frequency of the exchange.49
(c) pooling agreements, viewed more narrowly than the agreements of Article
3 of Regulation 823/2000 (and mainly encompassing the joint selling and
joint marketing of transport services by more carriers); it is noteworthy
that the compatibility of the pooling agreements under the Guidelines is
based on a rule of reason standard, taking into account the market shares
of the parties and other market parameters.50

IV. The US Treatment of Cooperation between Carriers: From

Airtight Regulation to Minimized Governmental Intervention

Like its EU counterpart, the US legislation on forms of horizontal arrange-

ment and cooperation between ocean carriers has shifted considerably from
the adoption of the initial Shipping Act of 191651 to the most recent Ocean
Shipping Reform Act, enacted in 1998.52 Since the first US legislation, of
paramount importance to antitrust enforcement have been the filing of
arrangements by the so-called “common carriers” and their approval by the
U.S. Shipping Board (later renamed the Federal Maritime Commission),
which was entrusted with the surveillance and regulation of maritime trade,
the policing of antitrust abuses, and the promotion and growth of US mari-
time trade worldwide.53 Under the Shipping Act of 1916, the filing and
approval of agreements mainly fixing or regulating transportation rates, the
pooling or allocation of earnings or traffic, the allotting of ports or provision
for exclusive or preferential arrangements was mandatory;54 it is therefore

49
Points 50–55 of the Guidelines.
50
Points 68–71 of the Guidelines.
51
39 Stat. 728 (1916).
52
Pub. L. 105–258, 112 Stat. 1902 (1998), amending various provisions of the Shipping
Act of 1984, 46 U.S.C. app. §§ 1701–1719.
53
As Netserowicz, M.A, insightfully put it, there is an inherent conflict in the functions
attributed to the Federal Maritime Commission; that which promotes the international growth
of US maritime trade may necessitate more lenient approaches towards possible antitrust abuses
by liner conferences, for instance. Netserowicz, M.A., op. cit., at 48, footnote 24.
54
Netserowicz, M.A., op. cit., at 49. On the difficulties of setting “reasonable” freight rates by
the US supervising authority, especially in the case of rate disparities for identical routes and
trades with those regulated under the Shipping Act 1914, see Note, Rate Regulation in Ocean
Shipping [1965] 78 HarvLRev 635, 647–648 (1965). Approval of prices under the Act was also
subject to a complex prior valuation of the revenues and costs of carriers and an allocation of
revenues between regulated and unregulated trades. Ibid. at 650,651. See also Buderi, Ch.,
Conflict and Compromise: The Shipping Act of 1984 [1986] 3 Int’LTax&BusLaw 311.
 e.u. and u.s. competition laws compared 59

evident that, with the exception of exclusive and preferential arrangements,

the ambit of the Act caught agreements with a subject matter similar to that
of Article 3 of the previously applicable EC Regulation 4056/86. In the
absence of filing, agreements having the above objects were tainted by illegal-
ity, while the Federal Maritime Commission was required to outlaw any agree-
ments introducing unjust discrimination between ports or shippers,55 or
“contrary to public policy”, a rather vague criterion which in essence gave a
free hand to the Commission to prevent any arrangement restricting competi-
tion otherwise than by mere discrimination, or, to the contrary, to permit
arrangements which introduced anti-competitive restrictions, but were
deemed to be beneficial for the promotion of US trade. By the same token,
practices using “fighting ships”, i.e. charging predatory prices or granting
“deferred rebates” (i.e. rebates after the completion of trade) were illegal.
Finally, rates were filed and put into effect only if approved, while deviations
upwards and downwards were prohibited.56
The advance approval system necessitated by the Shipping Act 1916 was
abolished by subsequent legislation introduced by the Shipping Act 1984,
with a view to greater flexibility in the transactions entered into by US com-
mon carriers and shippers, permitting them to become more competitive (for
instance, by charging lower prices to meet their rivals) in the international
scene.57 Following a rather proactive stance against shipowners by the US
courts, the Federal Maritime Commission and the US Department of Justice
under the Shipping Act 1916, it was felt that more room should be left to the
former, in line with the prevailing liberal trend in other jurisdictions. More
particularly, the establishment of a transportation system “in harmony with,
and responsive to, international shipping practices” became one of the princi-
pal pillars of Shipping Act 1984.58 The main novelties of the Shipping Act

55
Discrimination which is not “economically justified” is an offence contemplated not only
by Regulation 4056 on liner conferences, but also by Regulation 823 on consortia. See above,
Section III of this chapter. By contrast, the Shipping Act 1916 did not subject the evaluation of
alleged discriminatory practices to the consideration of its economic rationale, and therefore
could catch agreements despite their economic grounding, e.g. lower costs, etc.
56
Netserowicz, M.A., op. cit., at 52, 53. The determined rates were intended to guarantee
stability for the protection of shippers. By contrast, nowadays, such stability and protection of
users is being served by the conclusion of service contracts or the time charter of tramp services.
See also Ellsworth, R., Competition or Rationalization in the Liner Industry? [1979] 10 JMLC
497, 503.
57
See generally Giduck, J., The Shipping Act of 1984: A Return to Antitrust Immunity
[1985] 14 TranspLJ 153, 168–169.
58
See Blanco, L-O., op. cit., at 556 (responsiveness to international shipping practices mainly
entails an alignment of the US legislative regime with the tolerant policy of both the EU and
Japan towards liner conferences). Protectionism of US ship flag and satisfaction of US security
needs also to have been cited as another aim underlying the enactment of Shipping Act 1984.
If, however, protectionism merely safeguards the interests of shipowners under US flag, it does
60 emmanuel p. mastromanolis

1984 lay in (a) the elimination of the advance clearance requirement which
existed under the previous regime, despite the continued filing obligation of
contractual parties which, under certain circumstances, could give rise to
objections by the Commission,59 (b) the explicit provision for “open” liner
conferences, the membership of which was flexible, with entry and exit not
becoming excessively burdensome or even impossible,60 and, finally, (c) the
introduction of the so-called “independent action” right, in connection with
both rates and quality or prescriptions of services, which is quintessential to
the operation of modern maritime trade.61 The main terms of an independent
service contract nevertheless had to be made available to any “similarly
situated” shipper, despite the fact that not only could differentials be ulti-
mately justified by the differentiated status of each shipper, but also that such
requirement could freeze the common carriers’ incentives to compete on the
merits, in the wake of the antitrust challenging of differentiated, albeit pro-
competitive, treatment.62 On the substantive side, moreover, the area of
prohibited practices remained intact to a significant extent, as the conferences
of common carriers were now explicitly prohibited from engaging not only in
predatory contact, granting “deferred rebates”, but also in boycotts and refus-
als to deal.63 The abandonment of the vague “public policy” criterion could
however be viewed as a significant step forward, as the parties were allowed to
frame their independent contacts in line with demand and negotiations, with-
out fear of falling foul this standard.
The policy behind the Ocean Shipping Reform Act of 1998 (hereinafter:
“OSRA”) in turn seems to be in furtherance of the partial deregulation under-
taken by the provisions of the Shipping Act of 198464. Section 2 of the Act

not at the same time guarantee their competitiveness and survival in the long run; and, on the
other hand, reserve fleets, rather than liner fleets, which are mainly protected by virtue of the
Shipping Act 1984, cover US security needs. Ibid. at 557.
59
Instead, an agreement was valid following the lapse of a specific deadline from the filing
or the publication of the notified agreement in the Federal Register.
60
According the Act, withdrawal should be possible upon reasonable notice and without
penalty being imposed on the exiting member.
61
Netserowicz, M.A., op. cit., at 57. Any independent action was, nevertheless, to be notified
to the conference ten days before it would be put in force.
62
This obligation is commonly referred to as the “me-too” requirement. See Netserowicz,
M.A., op. cit., at 58.
63
It is submitted that a refusal to deal should be penalized only when it is not justified by
existing commitments (exclusive or other) of a common carrier.
64
Arguments in favour of the amendment of Shipping Act 1984 may be found in Bliss, D.
& Beddow, D., Should the Shipping Act of 1984 Be Amended to Eliminate Conference
Antitrust Immunity? [1989] 36 Fed B News & J 357, 357–360. On the main points of OSRA,
see Olney, A., A Report from the Marine Regulatory Front: Partly Cloudy with a Chance of
Thunder Storms [2000–01] 13 USF MarLJ 91 at 94. See also Danas, A., Europe 1992 and
 e.u. and u.s. competition laws compared 61

specifically reiterates that, like that of the Shipping Act 1984, the purposes of
the Act include the provision of “efficient and economic system in the ocean
commerce … in harmony with, and responsive to, international shipping
practices”, “the growth and development of United States exports” “with a
minimum of government intervention and regulatory costs”, and “by placing
a greater reliance on the marketplace”.65 Reliance is therefore placed by the
Act on market forces and the (at least) partial disengagement of common car-
riers and shippers from airtight regulatory interventions which applied in full
force, at least until the enactment of the Shipping Act of 1984.66
As in the previously applicable legislation, the subject matter of agreements
principally contemplated by the OSRA is the regulation of rates, the alloca-
tion of ports, and the allocation of cargo among carriers, i.e. conduct which
used to be dealt with under Article 2 of EC Regulation 4056/86, and cur-
rently requires their self-assessment of carriers in the EU. The Act, however,
covers also forms of behaviour which should be regarded as similar in nature
to pooling agreements (regarding traffic) and agreements relating to service
contracts (which could relate to the standardization of services, the transship-
ment, the cross-chartering of vessel space, etc) which could fall within the
scope of EC Regulation 823/2000.67
In a unified manner, however, and regardless of the subject matter of the
agreements (liner conference or non-conference, e.g. joint service agreement),
OSRA seeks to safeguard the right of all contractual parties to “independent
action”. More particularly, as a matter of minimum content, conference agree-
ments must provide this right to any conference member upon notice which
is no longer than five calendar days. Similarly, the prohibition or restriction of
transactions between a member of a non-conference agreement between com-
mon carriers and third parties (apparently outside the scope of the agreement)
may not be provided for in such agreements.68
While the right of independent action was also provided under the Shipping
Act 1984, OSRA goes a step further in a two-fold manner: first, by indirectly
departing from the “me-too” requirement, i.e. the requirement on a common
carrier to offer the same terms to “similarly situated” shippers, that applied

the Rise of the Pacific Rim: Do Changing World Trading Patterns Require a Change in United
States Shipping Laws? [1989] 22 Vand J Transnat’l L 1035.
65
On a previously proposed bill, see Snyder, P., The Proposed Ocean Shipping Reform Act
of 1995: An Interim Report [1995] 26 JMLC 545.
66
Blanco, L-O., op. cit., at 559.
67
OSRA, Section 4 (1), (3) and (4) versus Section 4 (2) and (7). By way of definition,
Section 3(7) of OSRA excludes from the object of “liner conferences” the provision of joint
services, consortia, pooling, sailing and transshipment arrangements.
68
OSRA, Section 5, (b) 8 and (c) 1.
62 emmanuel p. mastromanolis

under the previous regime; second, by amending the filing system for tariffs
and service agreements.
In connection with the “me-too” requirement, it is submitted that defining
which carrier is “similarly situated” to another which has secured a service
contract, and therefore can be offered the same service terms as latter, has been
a generic term which could easily fail to capture similarity in its full economic
context; also, by imposing such a requirement, the ocean carriers were under
an obligation which they could not avoid unless they could adduce evidence
to the contrary, i.e. to the effect that the two shippers were not “similarly situ-
ated”. The amendment introduced by OSRA prohibits a service contract from
requiring the disclosure of the contents of negotiations of a member with third
parties, with the exception of non-sensitive information which is published
pursuant to the new filing system.69 Confidentiality in turn fortifies the right
of independent action of carriers and allows them to frame their relationships
with shippers in line with demand and the specific status of each shipper.
As far as the new filing conditions are concerned, they now involve a pub-
lication (while the effective date is as a rule again set at the forty-fifth day
following the date of filing), but the standard of review of filed agreements by
the Federal Maritime Commission is now much less rigorous; unless a noti-
fied agreement prohibits the entry to or withdrawal from a conference agree-
ment, or prohibits independent action in a conference or non-conference
agreement, or mandates the disclosure of confidential negotiations with third
parties, the Commission will not raise any objections.70 Of course, it is open
to the Commission to object to a filed agreement and to seek an injunction if
it is likely that the agreement will give rise to service of lower quality or unrea-
sonable increases in transportation costs.71 It must be noted, however, that
such objections do not amount to an ex ante antitrust evaluation of agree-
ments, without which they cannot be put into effect; the burden of proof in
such cases also falls on the Commission, rather than on the carrier concerned.
Filed agreements furthermore enjoy antitrust immunity.72 Finally, tariffs of
conferences and common carriers are not subject to approval by the
Commission, but they are publicly available in electronic form to any
interested party, via an automated electronic system.73 Service terms are
made available to the Commission, but those relating to haul rates, service

69
OSRA, Section 5 (c) 2. The information published according to Section 8 (c) 2 of OSRA
is limited to the origin and destination ports, the commodities involved in the transportation,
the minimum volume or portion to be transported, and the duration of the service contract.
70
OSRA, Section 6 (a), (b), (c).
71
OSRA, Section 6 (g).
72
OSRA Section 7 (a).
73
OSRA, Section 8 (a) 1.
 e.u. and u.s. competition laws compared 63

commitments and liquidated damages for non-performance are not pub-

lished.74 However, basic offences in breach of OSRA remain, as under the
previous legislation, unjust discrimination, refusal to deal and predatory
behaviour.75
All in all, the scope of antitrust immunity under the OSRA remains wide,
in the sense that agreements between ocean carriers falling under Article 4,
which are subject to filing with the Federal Maritime Commission, virtually
relate to almost any possible form of co-operation and common planning
among the carriers. On the one hand, the fixing of transportation rates, the
allotment of sailings or ports and the limitation of the volume or cargo of pas-
senger traffic, and even the control, regulation and prevention of competition
in international ocean transportation or the discussion and agreement on any
matter relating to service contracts among ocean common carriers are immune
from antitrust scrutiny,76 subject to (a) the filing with the Commission (b) the
expiry of the cooling-off period contemplated in the OSRA, and (c) the con-
dition that such practices (in the case of conferences) amount to neither a
boycott or concerted refusal to deal with a third party nor to predation exclud-
ing the participation in a conference of a common carrier (in a manner ren-
dering the conference “closed”), or otherwise do not obstruct the right of each
conference member to independent action.77 On the other hand, however, the
fact remains that OSRA indirectly acknowledges the legitimacy of liner con-
ferences, despite the flaws for which they have in the past been criticized on
both sides of the Atlantic. A conference, no matter how open it is, and regard-
less of the degree of discretion it leaves to its members as to the terms to follow
in their arrangements with shippers, in fact remains a vehicle stimulating the
co-ordination of common carriers in matters for which co-ordination is not
indispensable, even if the specific characteristics of the shipping industry are
taken into account. Thus, to a certain extent (only specified ex post), it has
anti-competitive effects without any overriding business or other reason for
which it should be granted immunity.78
On the other hand, from a legal hierarchy point of view, the acknowledge-
ment of antitrust immunity for conduct prescribed in both the Shipping Act
1984 and the OSRA was possible in the United States and did not have to
overcome any “constitutional” limits as in the European Union. More specifi-
cally, none of the antitrust statutes in the United States (e.g. the Sherman Act

74
OSRA, Section 8 (c) 2.
75
OSRA, Section 10 (b) 4, 5 7, 10.
76
See OSRA Sections 4 (a) 1, 3, 4 and 6, 5 (b) 5 and 8, 5 (c), 10 (c) 1 and 3.
77
OSRA, Section 5 (b) 8.
78
See discussion and accompanying notes, supra.
64 emmanuel p. mastromanolis

of 1890) is a part of the US constitution; thus they may be overridden or their

application may be restricted by virtue of exceptional or specialized legislation
of the same level as those statutes. By contrast, the basic competition law
provisions in the European Union, namely Articles 81 and 82 of the EC
Treaty, may not be set aside by means of secondary legislation, e.g. by a
Regulation. Therefore any antitrust exemption may be introduced and inter-
preted within the bounds of those provisions (and, most notably, in the light
of the four conditions for exemption of the third paragraph of Article 81 of
the Treaty).79
What is more, under the OSRA, conference agreements may provide
authority for the adoption of voluntary guidelines relating to the terms and
procedures of service agreements,80 while the possibility of the conclusion
of “discussion” agreements between conference members is likewise not
ruled out. Therefore, it may be the case that the (pro-competitive) laxity
introduced by virtue of the independent action of conference members and
the open character of conferences will in fact be neutralized in the event
that the (explicitly voluntary) guidelines are implicitly followed by most or
all of the conference members, which also become party to discussion agree-
ments setting the terms and conditions of the service contracts. All in
all, efficiency, competition and reliance on the market place may be the
apparent targets of the “modernized” US policy on maritime trade; anti-
competitive co-ordination taking place in the wider context of the antitrust
immunity of common carrier behaviour may however be another (probably
more pragmatic and less academic) aspect of this policy. As has been insight-
fully put, the centre of gravity of the antitrust immunity in the United
States has recently moved from conferences to discussion agreements and
voluntary guidelines.81
What was actually ceded by virtue of the Shipping Act 1984 and later by
OSRA was control of maritime trade to carriers, while the level of administra-
tive regulation was gradually restricted to the minimum. This escalated dereg-
ulation in essence gives a free hand to carriers to frame agreements among
themselves as well as with shippers and other intermediaries or ancillary serv-
ice providers (for instance, marine terminal operators and ocean freight for-
warders) in the way they choose, subject only to certain restrictions and
regulatory requirements, along lines parallel to Regulation 4056/86 which
also favoured liner conferences and their arrangements to the benefit of their

79
Blanco, L-O., op. cit., at 561.
80
OSRA, Section 5 (c).
81
See Blanco, L-O., op. cit., at 559 and Sagers, C., op. cit., at 393, 394.
 e.u. and u.s. competition laws compared 65

members.82 It is not a coincidence that the maritime trade regulatory reforms

of both 1984 and 1998 in the United States have been, to a significant extent,
the product of vigorous lobbying by carriers to the US administration, as well
as of pressures stemming from third countries, including the EU Member
States and Japan, with a view to relaxing the hitherto prevailing administrative
control on US carriers, furthering the development of competition in the
same trades in which European and Japanese carriers also operated.83
A final interesting observation relates to the possible extraterritorial tensions
which may arise as a result of the submission of United States carriers84 to for-
eign laws imposing conditions that adversely affect their operations, especially
in the event that US does not subject non-US carriers to similar conditions.85
Following the repeal of Regulation 4056/86, some US carriers may indeed be
caught by Article 81 or 82 of the EC Treaty, for conduct or practices adopted
mainly in the US-EU transocean trade, but which have an effect within the
European Union. To the extent that such enforcement of the provisions of the
Treaty will be considered prejudicial or discriminatory for US carriers (as is pos-
sible, given the currently more permissive provisions of OSRA for shipowners
and carriers), OSRA now provides that action may be taken against foreign car-
riers, even if their “government is cause to” such unfavorable conditions (i.e. if
such conditions are imposed as a matter of law or governmental/ administrative
act), and this may take the form of either limitations of sailings to or from
United States ports or the suspension of any applicable tariff or service contract
filed with the Federal Maritime Commission, and, finally, the imposition of a
fee not exceeding $1,000,000 per voyage.86 These sanctions may be cumulative,
and their impact on the US-EU trade can be significant, since the majority of
carriers operating such trade are established in the Union. As far as the negotia-
tions and consultations envisaged in Regulation 4056/86 as a mechanism for
alleviating or resolving conflicts from the application of laws, regulations and

82
The amendments of the US legislation in 1984 and then in 1998 have been said to make
shipping transport regulation in the United States more “European”, i.e. similar to the regime
under Regulation 4056/86. Blanco, L-O. op. cit., at 554.
83
Blanco, L-O., op. cit., at 559. See also Sagers, C., op. cit., citing the fact that only a small
fraction of ocean shipping which serves transporation routes between the United States and
third countries is served by U.S., carriers; therefore, US import and export trade mainly depends
on carriers established in third countries, including EU and Japanese carriers.
84
Defined in Section 11a 6 of OSRA as “an ocean common carrier which operates vessels
documented under the laws of the United States).
85
OSRA Section 11a (b) 1 and 2.
86
OSRA Section 11 a (e) Protection against “unfavorable” conditions imposed on U.S.
shipping by foreign laws, rules and regulations was also provided in Section 19 of the Merchant
Marine Act 1920. See Lion, W., Open Markets or Protectionism for International Ocean
Shipping? Developments in United States Law and Policy [1985–86] 1 Conn J Int’l L 53, 57.
66 emmanuel p. mastromanolis

administrative actions of third countries (including the United States)87 are

concerned, they belong to the past after the repeal of the Regulation, and may
not provide a check on any severe measures enforced under the OSRA.

V. The EU and US Systems Compared: Developments and Prospects

When the E.U. and the U.S. competition law systems of maritime trade are
viewed in comparative perspective, they both appear to have by and large
followed a parallel path towards deregulation and adjustment to market
realities. The emergence of independent action outside airtight liner confer-
ences, of confidentiality in the course of private negotiations between com-
mon carriers and shippers, of new forms of contractual arrangements, of
containerization of cargo and of new tailor-made services has brought about
a profound change in the manner in which maritime trade is run, and this
was also reflected in the antitrust legislation on both sides of the Atlantic,
albeit at a different pace; as is evident from the U.S. legislative history, ad hoc
regulation of maritime trade and antitrust immunity of arrangements
between common carriers or common carriers and shippers date from the
beginning of the twentieth century, and U.S. law has changed rather slowly,
while the comparable shift in the E.U.’s competition policy seems to have
been more drastic, despite its relatively short history. While both the E.U.
and the U.S. systems were initially characterized by strong interventionism,
in practice prohibited the same anti-competitive practices and, to a signifi-
cant extent, necessitated ex ante regulatory control, the trend nowadays gives
more leeway to carriers and shippers to frame their arrangements in the man-
ner they see fit, nevertheless at the same time bearing the burden of running
their own compatibility check as well as the risk of potential illegality, in case
it later turns out that their own assessment has fallen foul of the applicable
antitrust regime. Also, in the two systems similar forms of anti-competitive
practices may be traced, including predatory pricing, loyalty rebates, dis-
crimination (that is unjust, according to OSRA, or is without economic jus-
tification in the E.U.), while unimpeded withdrawal from a liner conference
with minimum formalities is prescribed, either as an obligation to which the
exemption of consortia is subject under EC Regulation 823, or, in the alter-
native, as the minimum content of a filed horizontal agreement under the
OSRA, without which the Federal Maritime Commission may refuse their
clearance. As for information exchanges, they are not banned under US law,
and may be take the form of discussion agreements, while doubt is cast on

87
Regulation 4056/86, Articles 9 and 10.
 e.u. and u.s. competition laws compared 67

their legality under EU law, as the Commission’s guidelines state that such
legality will depend on a number of parameters, including the nature and
content of the information exchanges, the frequency of the exchanges, the
period to which they relate and, finally, the structure of the particular market
in which they occur.
Leaving aside the above basic similarities, however, the EU and US compe-
tition law approaches in the matter of horizontal co-operation differ in part in
substance and procedure or enforcement pattern, although such differences
do not negate the basic premise that deregulation underlies both of them.
Among those differences, the following may be cited:
(a) the U.S. immunity for liner conferences and other horizontal practices
from antitrust laws, as opposed to that under E.U. law, which, following
the repeal of Regulation 4056/86, subjects such practices to the generally
applicable competition rules enshrined in Articles 81 and 82 of the EC
Treaty, with the sole exception of Regulation 823/2000 on consortia;
(b) the treatment of all horizontal arrangements under a single specialized
legislative text (OSRA), covering all possible agreements from allocation
of cargo to discussion agreements and consortia, while the E.U. retains
specialized legislation only in connection with consortia, and other hori-
zontal agreements are covered by the general provisions of the EC
Treaty;
(c) the development of enhanced legal certainty under the EU system, given
that the consortia rules are to a significant degree detailed, while the recent
Commission Guidelines are aimed at lifting doubts in connection with
other arrangements not covered by the block exemption of Regulation
823; by contrast, with the exception of the generally applicable antitrust
offences (discrimination, predation, etc), there is no guidance on the
manner in which agreements filed and put into effect are to be scrutinized
by the U.S. Federal Maritime Commission;
(d) the procedural requirement for filing with the Federal Maritime
Commission all agreements between common carriers under the OSRA,
while, pursuant to Regulation 1/2003, notifications to the antitrust
authorities are no longer required, and the parties not covered by the
benefit of a block exemption must proceed to self-assessment;
(e) finally, the submission to competition law analysis of horizontal agree-
ments in the EU for the assessment of the market context in which they
are concluded and put into effect: both the Regulation on consortia and
the recent Commission Guidelines necessitate prior consideration of the
definition of the relevant product and geographic market, the calculation
of market shares of the contractual parties, the level of price and service
68 emmanuel p. mastromanolis

competition between the parties and between the latter and other sources
of rivalry, etc; by contrast, such market analysis is not contemplated in the
provisions of the OSRA.
Whatever the case may be, during the last decade, both systems seem to have
pointed in the same direction. And this is the departure from protectionism
and intervention which used to prevail in the US and EU approaches in the
area. In the European Union, less intervention has lately taken the form of
fewer specialized rules in favour of agreements and concerted conduct in the
field of maritime trade; in the United States reduced regulation, since the
enactment of Shipping Act 1984 and, more vividly, after the enactment of
OSRA, derives from the abolition of mandatory approvals by the Federal
Maritime Commission in connection with filed agreements among common
carriers or among the latter and ocean freight forwarders, limited disclosure of
contract terms and abolition of the “me-too” requirement. At a second level,
however, these developments in the United States favour shipowners and
make it possible for them to take advantage of the antitrust immunity of
Section 7 of OSRA, while respecting only the outer limits set out in its provi-
sions. Therefore they are more permissive towards various possible forms of
co-operation in maritime trade and, ultimately, restrictions of competition.
By contrast, the repeal of Regulation 4056/86 and the restricted ambit of
specialized rules now bring shipowners and carriers back to the umbrella
of Articles 81 and 82 of the EC Treaty, without taking advantage of the shield
of the repealed Regulation. This may in fact mean fewer mandatory rules, but,
at the same time, more intervention from the Commission, the competition
authorities of Member-States and the national judiciary with a view to pro-
hibiting anti-competitive conduct in breach of the EC Treaty.
Should this analysis prove to be correct, market developments in the
European Union will be more predictable. Economic efficiency and teamwork
bringing about lower costs which are passed on to shippers, or better services
which reflect their individual needs, are expected to be the norm. Inevitably,
free competition will drive some players in the maritime transportation mar-
ket out of business, may be of disadvantage to some small shippers, and may
cause major shifting of traffic from one port to another, with the ensuing
marginalization of some ports, which in turn serve as a hub for the surviving
“efficient” rivals to the exclusion of others. Arguments that this will be the
outcome of the new policy in maritime trade can be also grounded on experi-
ence accumulated from trucking and airline deregulation.88 Beneficial or not,
this policy is at least consistent with the competition policy followed in other

88
See Clott, Ch. & Gary S. Wilson, G., op. cit. at 214–217.
 e.u. and u.s. competition laws compared 69

industries, against the compartmentalization which in the past provided a safe

shelter for common carriers and their arrangements. By contrast, market
developments are far less predictable in the Unites States market. Despite the
fact that American antitrust legislation significantly predates the EU legisla-
tion, current US rules on maritime trade favour a “laissez-faire” policy that the
Union has sought gradually to abandon. In such context, the rigour of anti-
trust control over anti-competitive practices will depend on the interpretation
given to the OSRA rule of Section 10 (“prohibited acts”),89 favouring unfettered
competition, or, on the contrary, permitting forms of conduct similar to ones
previously exempted under Regulation 4056.90 In an era when the notion of
specificity of the maritime trade market,91 allegedly warranting specialized
rules in the preservation of the frequency of trades and the stability of freight,92
is seriously questioned, it is submitted that such interpretation should not
deviate from the general principles of the US antitrust legislation.93

89
It is interesting that, on several occasions, the US judiciary has turned against the interests
of conferences, especially before the enactment of Shipping Act 1984; by contrast, while
Regulation 4056/86 was still in force, at least a part of the EU jurisprudence was marked by
an unwillingness to question the rules of the Regulation in relation to their compatibility
with Articles 81 and 82 of the EC Treaty. See, e.g., decisions of the US Supreme Court
Federal Maritime Board v. Isbrandtsen Company, Inc. et al, 356 U.C. 481 (1958) and Federal
Maritime Commission v. Svenska Amerika Linien, 390 U.S. 238 (1968). See also Case C-339/95
Compagnia di Navigazione Maritima and Others v Compagnie Maritime Belge and others
(SUNAG), OJ 1995 C 395/4, removed from the register on 11 March 1998, and Blanco, L-O.,
op. cit., at 563.
90
“What has happened with US maritime transport is, therefore, a huge anomaly in legal and
economic policy terms. And it is more a step backwards than a step forwards, since in competition
matters it now puts US maritime trade back to 1889, before the Sherman Act. The European Union
is now a year ahead, at least as regards the philosophy on which control is based […] as it is clear
from […] the repeal of Regulation 4056/86 of 2006”. Blanco, L-O., op. cit., at 563.
91
Especially taking into consideration that only a small fraction of maritime trade (to the
tune of 20% on the basis of transport capacity in tons, at least for European trade) is run by
liners, with the remaining fraction left unregulated.
92
It is predicted that the neo-bulk cargo will be transported on specialized vessels in larger
volumes and at lower costs, while an increment of the market will still handle “LCL” (less-than-
container load). Blanco, L-O., op. cit., at 582, 583. Also, the exchange of information on the
rationalisation of ports, space charters and sailings is expected to bring about beneficial
results.
93
Ibid. at 575.
COMPETITION IN LINER AND TRAMP MARITIME TRANSPORT
SERVICES: UNIFORM REGULATION, DIVERGENT
APPLICATION?

Lia I. Athanassiou*

I. Introduction
1. The Ambiguous Exclusion of Tramp Services from the Scope of Reg. 4056/86
A. The Definition of the Tramp Service
B. The “Competitiveness” Assumption
2. The Impact of Regulation 1/2003
3. Benefits and Challenges to the Tramp Sector from the Maritime Reform
II. Definition of the Relevant Market
1. General Features
A. The Features of the Tramp Sector
a) Prevailing Conditions of Supply and Demand
b) High Degree of Dependency on the Trade Patterns
(i) Vulnerability to Trade Alterations
(ii) Adaptability to the Client’s Needs
B. The Division in Sub-Sectors
2. The Relevant Market under Competition Law
A. The Starting Point
a) The Service of Reference
b) The Providers and Recipients of the Service
B. Criteria Applicable to the Definition of the Product Market
a) Demand-Substitution
b) Supply-Substitution
C. The Problem of the Geographic Market
III. Assessment of Prima Facie Anti-Competitive Practices of Tramp Operators
1. Impediments to be Overcome
A. The Industry-Related Obstacles
a) Which are the Anti-Competitive Practices?
b) The Bad Precedent of the Liner Conferences
B. The Wide Scope of the Prohibition under Art. 81 EC
2. Main Parameters of Assessment
A. Market Power
B. Benefits
C. Indispensability
IV. Concluding Remarks

* Ass. Professor of Commercial Law, Faculty of Law, University of Athens.

 competition in liner and tramp maritime transport services 71

I. Introduction

The repeal of Regulation 4056/861 by Regulation 1419/20062 had two main

consequences: on one hand, it terminated the unusually generous block
exemption granted to the liner conferences; on the other hand it brought the
tramp services effectively into the scope of the competition rules. Neither was
really a surprise: Regarding the liner sector, the European Commission, sup-
ported by the European courts, has constantly underlined its disapproval
against the wide and unlimited immunity granted to the price-fixing maritime
cartels and used every opportunity to restrict the boundaries of the block
exemption.3 On the other side, the exclusion of the tramp sector from the
procedural rules provided for in Reg. 4056/86 has so far been considered by
the sector as a political victory partly attributed to Greek pressure. However,
with hindsight, it seems that this regime was not only ambiguous but also not
easily justifiable from a competition policy perspective, especially following
the adoption of Reg. 1/2003. The uniformity of the legal regime, undoubtedly
preferable, now creates new challenges of interpretation and implementation.

1. The Ambiguous Exclusion of Tramp Services from the Scope of

Reg. 4056/86
The Regulation 1414 had very early deprived the European Commission of
the power5 to enforce competition rules in the transport sector. Reg. 4056/86
filled this gap for all kinds of maritime transport including passenger services,
with the exception of tramp vessel services, as defined in Article 1(3)(a) of that
regulation. In other words, a transport service qualifying as tramping could
not effectively be caught by the European Commission6 but only by the
national authorities, through the application of national competition laws,
according to Art. 84 EC. Inversely, a service not able to enter into the definition

1
O.J. L 378, 31.12.1986, p. 4.
2
O.J. L 269, 28.9.2006, p. 1.
3
For a thorough analysis, see Athanassiou, G., Aspects juridiques de la concurrence mari-
time, Paris, ed. Pédone 1996, p. 149 et seq, Clough, M. & Randolph, F., Shipping and EC
Competition Policy, Butterworths, 1991, Munari, Fr., Il diritto comunitario antitrust nel com-
mercio internazionale: il case dei transporti marittimi, CEDAM Padova, 1993, Blanco, L.O.,
Shipping Conferences under EC Antitrust Law, Criticism of a Legal Paradox, Hart Publishing
2007, p. 568 et seq., Power, V., EC Shipping Law, 3rd ed., Informa UK, 2009. See also European
Commission, White Paper on the review of Regulation applying the EC competition rules to
maritime transport, SEC (2004) 1254.
4
Regulation no 141 of the Council exempting transport from the application of Council
Regulation no 17 (OJ 124, 28.11.1962), p. 2751.
5
Granted by Regulation 17 (first Regulation implementing arts 85 & 86 of the Treaty),
O.J. 13, 21.2.1962, p. 204.
6
The Commission could use only the insufficient means of control provided by Art. 85 EC.
72 lia i. athanassiou

of tramp was exposed to the procedural mechanism of control established by

Reg. 4056. However, the distinction was not very clear, because of the
difficulties in defining the service concerned.7

A. The Definition of the Tramp Service

The definition of tramping in Art. 1(3)(a)8 was twofold: it contained elements
both from the technical operation of the transport service seen individually,
and from the functioning of the market as whole.
The three operational elements, which all had to be fulfilled, provided a
description of the usual tramp transport service but certainly not a definition.
In fact, the method of shipment (in bulk or break bulk), the method of con-
tracting (total or partly charter of a ship by time or voyage charter or any other
form of contract) and the sailings’ characteristics (lack of regularity or lack of
advertisement) are all easily recognizable in what we could call traditional
tramping. However, one may wonder whether all the above elements exist
(and to what degree) in some newer forms of transport, lying at the frontier
between liner and non-regular services, as in the case of specialized shipping.9
The recent debates in the context of the UNCITRAL Convention on Contracts
for the Carriage of Goods Wholly or Partly by Sea demonstrated the same
difficulty in drawing the line between unregulated (subject to the freedom of
contract) and regulated transport activity.10 A detailed analysis of the service
envisaged would thus have been required before the Commission could deter-
mine whether it amounted to a tramp service excluded from the scope of the
Reg. 4056.11

B. The “Competitiveness” Assumption

The definition was complemented by the competitiveness assumption of the
sector as a whole. Seen from a commercial perspective, tramp services meant

7
Cf. Farantouris, N., European Integration & Maritime Transport, A. Sakkoulas &
Bruylant, Athens-Brussels, 2003, p. 330–332.
8
“The transport of goods in bulk or in break-bulk in a vessel chartered wholly or partly to
one or more shippers on the basis of a voyage or time-charter or any other form of contract for
non-regularly scheduled or non advertised sailings where the freight rates are freely negotiated
case by case in accordance with the conditions of supply and demand”.
9
This type of shipping transports large quantities of “specialized” trades (chemicals, motor
vehicles, forest products etc) generally using ships built for that purpose and operating
on a semi-regular basis (Cf. Clarkson Research Studies, The Tramp Shipping Market, April
2004, p. 2.)
10
The final text of the Convention as adopted by the UN General Assembly, on 11 December
2008 (the “Rotterdam Rules”), is available at www.uncitral.org.
11
European Commission, White Paper on Maritime Review, 2004, op. cit., Annex, para
160, note 80.
 competition in liner and tramp maritime transport services 73

the transport of goods “where the freight rates are freely negotiated case by
case in accordance with the conditions of supply and demand”.
It is not certain whether this second part, at least as interpreted by legal
doctrine, allowed better delineation of the excluded services. Although the
highly competitive nature of the tramp sector may not in principle be denied,12
the reference to the “free negotiability of freight rates” could have several
meanings.13 One possible interpretation would be to consider the competi-
tiveness assumption as the ratio of the exception,14 simply stating the reasons
which led to the exclusion of the tramp services. This option responded to the
industry’s need for legal certainty and was better coordinated with the uncon-
ditional definition of the Regulation’s scope set out in Art. 1(2). The second
option, supported by the majority of commentators,15 would be to consider
the competitiveness assumption as a condition for the exclusion: only if the
freight rates were indeed freely negotiated would tramp services escape the
Regulation. On the contrary, restrictions of competition in the tramp sector
appreciably affecting trade between Member States would come within the
scope of the Regulation and, consequently, under the control of the European
Commission.16 The latter option was in line with the principle that exceptions
to the EC rules are strictly interpreted and the need to maximize uniformity
in the application of competition policy; still, it could not easily be supported
by the letter of the Regulation nor by the intention of the legislator, for it
would have limited the scope of the exception only to conduct which could
not any way be attacked on the basis of the EC competition rules, thus depriv-
ing Art. 1(2) and 1(3)(a) of any practical meaning.

2. The Impact of Regulation 1/2003

The above described procedural schism has been accentuated by the adoption
of Reg. 1/2003 (the so-called “modernization regulation”17). Although Reg.
1/2003 replaced the procedural framework contained in Reg. 4056/86 as well
as in other sector-specific regulations, the tramp vessel services continued to
benefit from the exclusion regime.18

12
See, infra, II “Definition of the Relevant Market”.
13
Cf. Blanco, op. cit., p. 170–172.
14
See also 4th Recital Reg. 4056/86.
15
Inter alia, Ruttley Ph., International Shipping and EEC Competition Law [1991] ECLR
9, Clough & Randolph, op. cit., p. 181, Green, N., Competition and Maritime Trade. A Critical
View [1989] Dir. mar. 617, Kreis, H., Maritime Transport and EEC Competition Rules [1989]
Dir.mar. 570, and more recently Ersbol, N.S., The European Commission Enforcement Powers:
An Analysis of the Exclusion of Tramp Vessel Services From Regulation 4056/86 and Regulation
1/2003 [2003] ECLR 375, 381–82.
16
Cf. the arguments developed by Blanco, op. cit., p. 170–171.
17
O.J. L 1, 4.1.2003, p. 1.
18
Article 38 Reg. 1/2003 (the relevant article 1 Reg. 4056 was not amended).
74 lia i. athanassiou

The contrast seemed incongruous. Having replaced the authorization pro-

cedure with the legal exception system, Reg.1/2003 aimed at promoting effi-
cient and cost-saving enforcement of the EC competition rules; it did so by
granting national authorities and national courts the power to apply not only
Arts. 81(1) and 82 of the EC Treaty but also Art. 81(3).
However, as before, the tramping and cabotage sectors escaped the new
decentralized system. The legal consequences were more or less evident: First,
the Commission remained without efficient enforcement powers relating to
fact-finding and the imposition of remedies and penalties, being obliged to
rely on the slow and complicated mechanism19 provided by Arts. 84 and 85
EC and thus largely to depend on the responsiveness of the Member States.20
National authorities were deprived of the cooperation schemes provided for in
Reg. 1/2003. Last but not least, the role of the national judge (transformed
into a weapon in the decentralization system) was unclear, if not weakened.21

3. Benefits and Challenges to the Tramp Sector from the Maritime Reform
On March 27, 2003 the Commission launched a consultation paper on the
review of Reg. 4056/1986, inviting comments on a number of key issues for
maritime competition policy. Although focus was on the review of the
substantive provisions (mainly the future of the block exemption for liner
conferences), the paper also addressed the need to abolish the procedural
exclusion of tramp services.22 Reg. 1419/2006 terminated this period of
immunity as from its entry into force.23

19
It has never been applied in the maritime sector. Rare examples in the air sector (UA/LH/
SAS alliance) show the length and inefficiency of the system (references by Ersboll, op. cit.,
p. 377).
20
Ersboll, op. cit., p. 376 et seq.
21
It has been argued, including by the Commission itself, that since no implementing provi-
sion has been adopted, a national court does not itself have jurisdiction to hold that the practice
in question is automatically void under Art. 81(2) (see Commission discussion paper on the
review of R. 4056 [2004], paras 132–133). This argument is based on the ECJ jurisprudence
dealing with the powers of the national court in the air sector before the adoption of the imple-
menting regulations (Case 209/84, Ministère Public v. Asjes [1986] ECR 1425). It had ruled that
a restrictive practice could not be declared void if the parties were not given the opportunity to
show the merits of their agreement; this opportunity was excluded as no authorization proce-
dure had been established for the sectors being examined. However, it is doubtful whether the
same constraints are today imposed on the national judge, given that the authorization proce-
dure has been completely eliminated (see the convincing approach of Blanco, op. cit., p. 175).
22
For the review process, see Stragier, J., The Review of the EU Competition Regulation for
Maritime Transport, 10th Annual EMLO Conference (18.6.2004), available at ec.europa.eu/
comm./competition/speeches/text/sp2004_2006_en.pdf.
23
The block exemption of liner conferences was granted an additional period of 2 years,
until 18 October 2008 (article 1 Reg. 1419/2006).
 competition in liner and tramp maritime transport services 75

From a competition policy point of view, the advantages of the reform are
obvious. An important (from the tonnage and cargo point of view) segment
of maritime industry is now brought into the scope of the procedural system
established by Reg. 1/2003. Uniformity of enforcement powers in the compe-
tition field is achieved without any exception.24
From the industry point of view, changes are not as radical as in scheduled
transport25 and one may argue that the situation in the tramp sector has not
seriously worsened. It is true that, with the exception of one reported case,26
the tramp sector has not suffered an investigation during the 18 years of Reg.
4056, eventually by reason of the inefficient enforcement tools at the disposal
of the Commission. However this cannot be taken for granted, mainly in
view of the ambiguous and uncertain nature of the exclusion described
earlier.27
However, this uniformity is itself a source of challenges for both the com-
petition authorities and the tramp industry. The first have to understand the
structure and functioning of the market; the latter to accept the obligation to
act in conformity with the competition principles and show that it does so.
The risk of confusion is real, as the only available precedents derive from the
application of the competition rules in the liner sector. This chapter attempts
to clarify some key issues relating on one hand to the definition of the relevant
market (see Section II), on the other hand to the evaluation of restrictive prac-
tices in the tramp sector (see Section III), taking into account the particular
features of the transport in question.

II. Definition of the Relevant Market

The features of the tramp sector as such have henceforth limited legal signifi-
cance. They are no longer considered in abstracto as a legal presumption or a
condition for exclusion from the implementing provisions as was the case
under the previous regime. Neither are they sufficient, under the new regime,

24
Air transport services between MS and third countries have also been subject to the same
regime (arts 3 to 19 of Reg. 3975/87 laying down the procedure for the application of the rules
on competition to undertakings in the air transport sector, have been repealed by art. 39 of
R. 1/2003).
25
Where one may talk of the end of the self-regulatory period, which lasted for over a
century.
26
An investigation has been reported into the possible participation of several deep-sea
chemical tankers in a cartel (Commission MEMO 03/38), cited by Ersboll, op. cit., note 9.
27
As early as in 2001, the establishment of the Cape International Pool was notified under
Reg. 4056/86, inviting the Commission’s opinion on the applicability of the exclusion regime
to the pool’s activities (cited by Ersboll, op. cit., note 3).
76 lia i. athanassiou

for the definition of the relevant market from the competition law point of
view. However, understanding those general characteristics may be useful as
background information facilitating the comprehension of the structure and
the operation of the sector.

1. General Features
Despite the umbrella of the commonly identifiable characteristics (see A
below), it should not be overlooked that the tramp sector is a generic term
including several autonomous market segments (see B below).

A. The Features of the Tramp Sector

Two main features are of relevance for our discussion: the prevailing condi-
tions of supply and demand and the high degree of dependence on trade
patterns.
a) Prevailing Conditions of Supply and Demand
In practice, there is no such thing as perfect competition. However, it is often
submitted that, unlike the liner market, the tramp sector operates in condi-
tions quite close to the theoretical model governed by the law of supply and
demand. The four elements supporting this assumption are in principle detect-
able: numerous undertakings none of which are in position to influence the
prices offered, homogeneous product, transparency of information and easy
access to the market.28
Recent studies show that ownership is indeed highly dispersed. The sector
is characterized by a large number of small shipowning companies usually
each owning fewer than five vessels which, in addition, are of different types.29
Being so small in comparison with the total demand, no player is in position
seriously to affect prices by his actions.30
The homogeneity of the product may be ascertained only in the sense that
all undertakings supply ship space for transport purposes. Being so general,
this affirmation has little value from both an economic and a legal point of
view. Economically speaking, one may note that the more the sector becomes

28
See Vettas, N. & Katsoulakos, Y., Competition Policy and Policy of Regulation, Athens
2004 (in Greek), p. 42 et seq.
29
According to the study prepared by Clarkson, 26.000 vessels of the world’s total mer-
chant fleet were controlled by almost 5,000 companies. In other words, almost 90% of the
companies control fewer than 10 vessels and on average they each control fewer than 3 vessels
(The Tramp Shipping Market, op. cit., p. 2, also EU Report COMP/2006/D2/002 “Legal and
Economic Analysis of Tramp Maritime Services”, prepared by Fearnley Consultants AS., 2007,
paras 118, 119).
30
Vettas & Katsoulakos, op. cit., p. 42.
 competition in liner and tramp maritime transport services 77

responsive to customers’ needs, the less homogeneous is the service provided.

Thus, similarity of services can be identified only in the sector segments and
not in the tramp as a whole. Legally speaking, homogeneity is not a useful
notion as such, but only as part of the demand substitution test. As will be
further discussed, this test entails a determination of the range of products
and/or services viewed as substitutes by the client.
Transparency of information implies that competitors and clients are aware
of the prices offered by other undertakings. Nothing could be closer to the
truth in the tramp sector. For the large bulk commodities, price information
is immediately and continuously available to all interested parties from a vari-
ety of sources, although for more specialized types of vessels information may
be less readily available.31
The last factor, easy entry and exit, may be seen from two different perspec-
tives, the short-term and the long-term. When defining markets for competi-
tion law purposes, such information may be useful for assessing supply-side
substitutability, i.e. the extent to which existing suppliers are able to switch
production to the relevant services and provide them in the short term.32 This
question will arise internally and will focus, in practice, on the reaction of the
suppliers operating in the various sub-segments of tramp. From a longer-term
perspective, access to the market is closely linked to the concept of potential
competition implying an analysis of the conditions of entry. Such analysis is
normally carried at a later stage, once the relevant market is defined, in order
to evaluate the competitive constraints exercised on the undertakings under
investigation.33 It is suggested that, in principle, the sector as a whole is char-
acterized by easy entry and exit conditions. Although the production tool, i.e.
the ship, may cost several million US$, the active financing market effectively
mitigates the capital cost barrier to entry in the tramp sector.34 Production
technology is equally accessible. Additional barriers relating to access to
organizational, commercial and know-how resources do exist, but they are
significantly mitigated by the way the tramp sector operates, and mainly by
the existence of a multiplicity of intermediaries, like ship managers and ship
brokers. However, one should not underestimate the barrier relating to time,

31
According to the Fearnley Report “Legal and Economic Analysis of Tramp Maritime
Services”, the Baltic Exchange publishes daily reports covering over 64 individual routes for
tankers, bulk carriers and gas carriers and produces, in addition, seven indices based on freight
assessment (op. cit., p. 19).
32
Commission Notice on the definition of relevant markets for the purposes of Community
competition law, OJ C 372/9.12.997, p. 5, no 20.
33
Bellamy & Child, European Community Law of Competition, 6th ed., OUP, 2008, paras
4.020, 4.054.
34
About the principal forms of ship finance, see the Fearnley Report “Legal and Economic
Analysis of Tramp Maritime Services”, op. cit., Section 1.9.
78 lia i. athanassiou

as it takes a long time from contract to delivery for a newbuilding project;

thus, the global capacity of transportation is essentially fixed.35
b) High Degree of Dependence on the Trade Patterns
All sectors display a certain degree of dependence, upstream and downstream.
However, this dependence is significantly high in the tramp sector, far more
important than that noticed in liner transport. It has two aspects: (i) vulnera-
bility to trade alterations and (ii) adaptability to the clients’ needs.
i) Vulnerability to Trade Alterations. Tramp ships are, by definition, supposed
to call at any port to carry whatever cargos are available, in contrast to liner
ships which trade on specific routes between advertised ports.36 The transport
service follows the cargo, not vice versa. That means that the supply side is
highly dependent upon the developments and movements on or possible
disequilibrium of the (industrial) demand side.
Trade flows may fluctuate predictably or unpredictably, move regionally or
switch more permanently from one commodity to another, for different rea-
sons. For example, in the case of the energy commodity group (accounting for
close to half of seaborne trade)37 or even the metal industry group,38 a multi-
plicity of provision sources are available to buyers. The choice depends mainly
on the reference and effective price of the commodity offered, but it may also
be influenced by other factors (long term strategic choices, political influence,
entry to new markets, switch to more environmentally friendly energy com-
modities etc). For some cargoes, like agricultural39 or forest products,40
seasonal, climatic or adverse external parameters (like physical catastrophes or
epidemics) are also factors to be taken into account. Transport price, the so-
called freight, is an element included in the total cost of the commodity, and
thus scrutinised by the buyer, but has no decisive character in the sense that it
may not alone alter trade flow.
In fact, fluctuations in the freight rates of the spot market 41 reflect the volatil-
ity of the demand side and the time needed by the shipping industry to adjust.

35
Ibid, p. 23.
36
Cf. Brodie, P., Dictionary of Shipping Terms, 2nd ed., LLP, 1994, p. 189.
37
This group includes crude oil, oil products, liquefied gas and thermal coal (“The Tramp
Shipping Market”, op. cit., p. 9).
38
This group includes raw materials and the products of the steel and non-ferrous
metal industries which account for 25% of the sea trade (“The Tramp Shipping Market”,
op. cit., p. 9).
39
This group includes 12 commodities (i.e. cereals, animal feedstuffs, sugar, molasses, refrig-
erated food, fertilizers) accounting for 13% of sea trade (Ibid, p. 9)
40
The trade includes wood pulp, plywood, paper etc. and is strongly influenced by the
availability of forestry resources (Ibid, p. 9).
41
Spot rates, either freight (price paid per unit of cargo between 2 ports) or hire (daily rate
paid for the use of the ship), are prices agreed for charters to commence immediately. Reflecting
 competition in liner and tramp maritime transport services 79

When demand for transport space exceeds the supply of ships, freight rates
spike because no further sea transport is available. The imbalance provoked by
external changes on the demand side will impact temporarily on prices, until
the sector reaches equilibrium again. Conversely, freight rates drop when sup-
ply exceeds demand. Two preliminary conclusions may be drawn from this
observation: first, when delineating the relevant market, it will be difficult to
define to what extent an increase in the transport service price may result in a
switch in cargo flow. Secondly, when assessing a prima facie restrictive agree-
ment, it has to be understood that the supply side cannot by definition act
without taking into account the possible reaction of the demand.
ii) Adaptability to the Client’s Needs. Dependence is not reflected just by the
geographical movement of ships and the formulation of prices. It also has an
evolutionary aspect which is self-evident when one contemplates the sector’s
picture during the 20th century.
During the first half of the 20th century, liner and tramp vessels were of a
similar size, with multiple decks designed for stacking mixed cargo or carrying
bulk cargo in the bottom hold. Interchangeability was the advantage of this
system, albeit at a high labour cost.42 The economic features of the second half
of the century were quite different: traditional trades (raw materials) grew to
face the increased demands of heavy industry, and new trades appeared to take
advantage of favourable internationalization conditions. The shipping indus-
try was imperatively called to adapt, as conventional liner and tramp shipping
had been proved inefficient in serving the new customers’ needs. This evolu-
tion is reflected in the size and the type of vessels.
Unlike liner shipping, tramp is destined to transport large parcels. When
the parcel size of a commodity increases, so does the size of the vessel. There is
no more eloquent example than comparing an ULCC crude oil tanker of
490,000 dwt with an Aframax of 80,000 dwt or a Panamax bulk carrier with
an Ore Carrier of 230.000 dwt.43 An increase in the vessel’s size allows econo-
mies of scale to be achieved, supporting the industry’s suggestion that the
tramp services are very cost-effective.44

price fluctuations immediately, they serve as the starting point of negotiations in all parts of
the industry; the duration of the ship fixing [what is ship fixing?] as well as the parties’ expec-
tation on the future spot levels will be also taken into account (see the Fearnley report, op. cit.,
p. 22).
42
Tramp vessels were able to switch between carrying bulk cargoes and being chartered by
liner services when extra capacity was needed (“The Tramp Shipping Market”, op. cit., p. 11).
43
Georgantopoulos E. & Vlaxos, G., Maritime Economics, Piraeus, 1997 (in Greek), p. 175
et seq.
44
According to the “Tramp Shipping Sector” report, the trend price of freight between 1960
and 1990 increased only from 9 $/ton to 13$/ton (p. 16). See also EU report, op. cit., p. 30.
80 lia i. athanassiou

Specialization is the second aspect of evolution and responds to the need for
safe, reliable and fast transport service. For some categories of cargo, efficiency
improvement goes hand in hand with investment in specially designed vessels
and handling systems. That was the case with refrigerated cargo, forest prod-
ucts, motor vehicles and other equipment, chemicals etc.45 The emergence of
specially designed ships calls for a review of the tramp market segments.

B. The Division in Sub-Sectors

We traditionally distinguish between two main sub-sectors: liquid bulk and
dry bulk.46 Obviously, one can no longer stop here: adaptability brought about
a third segment, known as “neo-bulk”, or “specialized” or “industrial” or
“semi-liner sector”. This last sector is not qualified by the nature of the cargo
(which is very diversified and may fall into either the liquid or the dry bulk
category) but by the specificity of the vessel design and of the handling opera-
tions. Refrigerated cargo, forest products, motor vehicles and chemicals are
now classified as belonging to this new segment.
Specialized maritime consultants, much better placed than a jurist, proceed
to further division identifying sub-markets in the above sub-segments, using
as their criterion either the nature of the cargo or the type and/or the size
of the vessel. Thus, in liquid bulk, a recent study commissioned by the
European Commission identified 6 segments on the basis of the cargo shipped:
1) chemical, 2) clean petroleum products (CPP), 3) crude oil, 4) dirty
petroleum products (DPP), 5) liquefied natural gas (LNG), and 6) liquefied
petroleum gas (LPG). The specialized sector has been divided by reference to
the ship (OHBC, PCC, Reefer and RO-RO) or to the cargo (refrigerated, for-
est products, motor vehicles, liquid gases and chemicals). Suggested divisions
for dry bulk refer only to the size of the ship. Studying the above sub-segments
more closely may yield useful information on shipowning patterns, geographi-
cal regions of operation, the range of ports served, entry barriers and, more
importantly, the substitutability of the vessels used. Although providing useful
guidance for the definition of the relevant market under competition law, the
above segments may not ipso facto qualify as relevant markets by themselves.

2. The Relevant Market under Competition Law

The first step in reasoning when assessing a competition case is the definition
of the relevant market which provides useful input concerning the impact on

45
“The Tramp Shipping Sector”, op. cit., p. 13–14.
46
The first transports products in liquefied state, using vessels designed to this end (mainly
tankers). The second transports commodities in dry form, allowing homogenous handling.
 competition in liner and tramp maritime transport services 81

inter-state trade and the impairment of competition.47 The relevant market is

of crucial importance48 not only when considering the existence of a domi-
nant position under Art. 82 EC but also when applying Art. 81(1) and (3) EC
in order to assess the anti-competitive threat of a restrictive agreement.
Obviously, the broader the definition of the relevant market, the less possible
it is that the examined behaviour will raise concerns under competition law.
This section attempts a first scholarly exercise on how the general criteria used
for the definition of the relevant market, the product one (see B below) as well
as the geographical one (see C below), would apply to tramp transport services
(see A below) and the difficulties arising out of this,49 taking into account the
recent “Guidelines of the European Commission on the application of Article
81EC to maritime transport services”.50

A. The Starting Point

a) The Service of Reference
We focus here on the transport services provided by tramp vessels. Thus, the
service of reference is the provision of ship space for transport purposes. That
corresponds to the sector as previously excluded from the implementing
Regulation 4056/86. The abovementioned Draft Guidelines also refer to the
transport aspect.
Other products and services relating to the organization and/or operation
of the shipping industry, like the sale of new-built ships, the sale and purchase
of second-hand ships, the sale of ships for demolition purposes, the provision
of technical management services, the provision of ship space for other than
direct transport purposes, cargo or ship agency services, are not examined as
they are not relevant to our discussion. Moreover, the majority, if not all, of
them did not fall within the favourable “immunity” regime reserved to tramp
vessel services.51
b) The Providers and Recipients of the Service
The service of reference allows for a first delineation of the supply and the
demand side. This may be helpful, given the number of persons who can be

47
Case T-62/98, Volkswagen v. Commission [2000] ECR II-2707, para 230, joined Cases
T-374/94, T-375/94, T-384/94 and T-388/94, European Night Services and Others v. Commission,
[1998] ECR II-3141, para 103.
48
Case 6/72, Continental Can [1973] ECR 495, para 32.
49
Given the fact that market definitions are contextual and non-static (see Bellamy & Child,
European Community Law of Competition, op. cit., paras 4.021, 4.023).
50
SEC (2008) 2151 final, 1.7.2008.
51
Each of them, eventually constituting a separate market, may present a particular interest
under the competition provisions stricto sensu or the state-aid rules. This is, for example, the
case of the ship-building industry (see “Framework on state aid for shipbuilding”, O.J.
C 317/30.12.2003, p. 11).
82 lia i. athanassiou

involved in the shipment and transport of a bulk commodity. On the cargo

side, one may mention the seller and the buyer of the cargo, the shipper, the
intermediary trader or traders; on the transport side, reference can be made
to the shipowner, the ship operator, the charterer and eventually the sub-
charterer. These persons are usually involved at sequel levels in the purchase
and sale of ship space for transport purposes. However, although the legal
qualification of their role is crucial under private law in order to define the
rights and obligations of the parties involved and the liabilities resulting there
from, this is not so under competition law. In the latter field, supply and
demand are viewed on a basis of a more economically orientated approach.
Thus, the supplier of the service is the person offering ship space for transport,
independently of whether he owns the vessel or acts as a ship-operator; in the
same sense, the demise charterer who operates the vessel and trades it for his
own account comes into the category of suppliers.52
Regarding the demand side, it is the cargo interest which is crucial and not
the shipper who has contractually arranged for the cargo to be shipped.53 The
criterion of demand-substitutability will be examined by reference to the cargo
interests. It is the needs and choices of those persons which are indications
about trade flows and existing substitutes.

B. Criteria Applicable to the Definition of the Product Market

a) Demand-Substitution
The relevant market includes the range of products viewed as substitutes by
the demand side.54 This analysis begins by examining, from the consumer
point of view, the characteristics and the intended use of the service
concerned.
The European Commission suggests in its Guidelines that the initial step in
the above exercise should be to identify the “main terms” of an individual
transport request, since these terms generally identify the essential elements of
the transport requirement at issue.55 Thus, depending on whether the main
terms are negotiable or non-negotiable, we may end with a wider or narrower
definition of the market.
The Commission’s argument is not convincing from a methodological
point of view. In fact, the starting point is fixed too late, presupposing that the
cargo owner has already made his decision about the best way of shipping the

52
For the content of demise charter-parties, see Hill, C., Maritime Law, LLP 1999,
p. 177–78.
53
The two may be the same.
54
Notice, op. cit., para 15.
55
Op. cit., para 22.
 competition in liner and tramp maritime transport services 83

commodity to its destination. However, research into substitutes normally

takes place at an earlier stage, when the customer examines which the available
transport services are. From this point of view, a clear starting point would be
the nature of the commodity to be shipped.
Having the nature of the cargo as a starting point, one has to examine,
theoretically and in practice, the characteristics and the intended use of the
existing transport services in order to decide which of them are sufficiently
interchangeable. At this point an interesting difference arises between liner
and tramp transport. While the first has evolved, following the containeriza-
tion revolution, as a standardized service where the nature of the cargo has
limited (if any) impact on the provision of the service, the second has under-
gone a specialization process witnessed by the diversified types and sizes of the
vessels. That explains why, in the liner sector, the European Commission, with
approval from the European Courts,56 faced no particular difficulties in
completely identifying the containerized liner services as the relevant product
market for liner shipping. The same is not true for the tramp shipping.
The characteristics and the intended use of ships should be examined both
from a technical and a commercial point of view. In other words, we must
examine whether transport services by other ships are technically equivalent,
commercially interchangeable and physically available.
Depending on the cargo concerned, some types and sizes of ships are indeed
interchangeable from a technical point of view. This can be judged only on an
ad hoc basis, also taking into account the handling facilities in the ports to be
served. For example, in the more differentiated liquid bulk, some categories of
chemicals may be carried on chemical parcel tankers but also on CPP tankers
and on crude oil tankers; crude oil may be carried on crude oil tankers but also
on CPP tankers and on chemical parcel tankers; clean petroleum products
may also be carried on chemical parcel tankers. Dry commodities may be car-
ried on all dry bulk vessels. However, interchangeability between liquid bulk
and dry bulk vessels is not at all likely to occur. Eventually, for some cargoes,
one should extend investigation into other forms of maritime transport or
other forms of transport in general. For example, motor vehicles or forest
products can be carried on specially designed vessels but also on RO-ROs,
reefers and even container vessels. LNG is transported on purpose-built ves-
sels but also through pipelines. On the other hand, other commodities, such
as liquefied petroleum gas, are carried on only one vessel type, consequently
restricting the first step of the market definition.

56
I.e. Commission Decision 1999/243/EC (Case IV/35.134 – TACA) OJ L 95, 9.4.1999,
p. 1 paras 60–84, confirmed by CFI, Cases T-191/98, 212/98 to 214/98, Atlantic Container
Line AB and Others v. Commission, [2003] ECR II-3275, paras 781–783.
84 lia i. athanassiou

Interchangeability between the different sizes again has a technical aspect,

but it alsp implies commercial parameters. Thus, the question arises whether,
taking into account the size of consignments of the cargo being examined, the
cargo interest would be willing to shift from a Capesize to a Panamax or vice
versa. The answer is related to price.
The test proposed by the Commission is to postulate a hypothetical small,
long-term change in relative prices and evaluate the likely reactions of the
demand side to that increase (the so-called “SSNIP test”). The demand substi-
tution arising from such small permanent changes in relative prices may pro-
vide useful evidence for the definition of the market. To say, as is often
suggested, that the demand side is price sensitive mainly for the shipment of
low value commodities is not concrete enough. General research on cross-
price elasticities57 is useful if based on actual data. However, our reservation is
precisely on the availability of actual price data about substitutability.58 Given
the influence external factors have on freights, it is difficult to extract reliable
information on the anticipated reaction of consumers towards small changes
in prices. In such cases, it would be preferable to be thrown back on subjective
assessments and experience of the parties in similar situations. Useful input
could be also provided by the structure of supply and demand and the com-
petitive conditions prevailing in the neighbouring market sub-segments.59
The third question on the physical availability of transport services is more
linked to the supply-substitution issue and will be discussed under this
heading.
b) Supply-Substitution
Substitutability from the supply side is meaningful when its results confirm
the conclusions reached by demand-substitution research in terms of effec-
tiveness and immediacy. The purpose of this exercise is mainly to ascertain the
boundaries of the product market already delineated and, in some cases, to
widen them if suppliers are able to offer and sell various services immediately
and without significant increases in costs.
Cost and time here are the crucial criteria. It was mentioned above that
crude oil tankers are able to transport clean and dirty petroleum products. If
the time needed for the switch is limited (i.e. one or two days of cleaning) and
the cost is insignificant (i.e. for the establishment of additional equipment),

57
Cross-price elasticities measure the extent to which demand for a product changes in
response to a change in the price of some other product (cf. Wish, R. op. cit., p. 34).
58
Cf. Bellamy & Child, European Community Law of Competition, op. cit, para 4.017.
59
Case 322/81 Michelin v Commission [1983] ECR 3461, para 37, Case T-83/91 Tetra Pak
v. Commission [1994] ECR II-755, para 63, Case T-86/95, Compagnie générale maritime and
Others v. Commission (FEFC), [2002] ECR II-1011, 48, 52–53.
 competition in liner and tramp maritime transport services 85

then it is likely that the outcome of supply investigation will confirm the con-
clusions on demand-side substitutability.
Obviously, tonnage must be available for a switch to occur, a question which
leads us to discuss the contractual arrangements for fixing on a vessel. Guidelines
mention the variety of transport contracts, but not in the right place nor in the
right way. Types of charters are envisaged as factors affecting the nature of the
service provided in tramp shipping and, thus, demand substitutability.60
From a private maritime law point of view, different types of charters serve
different purposes and entail differentiated rights and obligations for the con-
tracting parties. Under the provisions of the time charterparty, the shipowner
agrees that the ship named in the document shall be placed at the disposal of
the charterer for his use for a defined period of time, against a daily hire rate
payable in advance.61 Under a voyage charterparty, it is agreed that a vessel will
load at one or more named ports a particular specified cargo to be carried to a
named discharging port or ports.62 Other hybrid forms (like trip charters) are
also possible.63 Choosing the manner of deciding on a vessel and the contractual
veil corresponding to this choice is predominantly an entrepreneurial decision.
One shipowner, in search of stability, may prefer to fix his vessels in long-term
contracts although with lower freights; others may favour the spot market.
However, there is no such thing as segmentation of the market on the basis of
contractual agreements, in the sense that some carriers offer only this or that
kind of charterparty. For the same reason, no one envisages dividing the con-
tainer liner market according to whether the carrier has entered into a normal
contract covered by a bill of lading or a slot charterparty or a service contract.
The form of fixing is meaningful only in the sense that some tonnage may
be captured, in other words that it is not available for a period of time. Indeed,
some cargoes, mainly the specialized ones but also petroleum products, seem
more linked to long-lasting transport agreements, each for different reasons.
This lack of availability may be taken into account ad hoc as long as it lasts
(this is the so-called “temporal dimension of the market”). The fact that those
vessels may occasionally enter the spot market is not relevant from a competi-
tion law point of view.

C. The Problem of the Geographic Market

Defining the boundaries of the geographic market in tramp shipping is a com-
pletely different exercise from that undertaken hitherto for liner shipping.

60
Guidelines, op. cit., para 23.
61
Hill, C., op. cit, p. 179 et seq.
62
Ibid, p. 218 et seq.
63
Ibid, p. 178–179.
86 lia i. athanassiou

In both cases, the rule is that we are looking for geographical areas in which
the conditions of competition are sufficiently homogeneous and which can be
distinguished from neighbouring areas characterized by appreciably different
conditions of competition.
Liner service generally includes a range of ports at each end of the service.64
The Hellenic Competition Commission has even narrowed the definition to
each separate line, taking into account partial substitutability between neigh-
bouring ports, in a decision which cannot however be generalized because it
was arrived at under the previously protectionist and highly regulated regime
of cabotage.65 The same cannot be said for tramp shipping which is by nature
non-scheduled. Obviously, there are ranges of ports if one places oneself at the
demand side, in the sense that the cargo interest has at its disposal a certain
number of loading and discharging ports from among which he must make a
choice. However, this geographical market is an open one, because other vessels
operating in neighbouring or distant areas may quickly seek the business with-
out the additional cost faced by the repositioning of the liner vessel. This ele-
ment, unknown in other economic sectors, has never been examined before in
defining geographical markets. It may however be seriously taken into account
when evaluating the power of the parties involved to affect competition.

III. Assessment of PRIMA FACIE Anti-Competitive Practices

of Tramp Operators

1. Impediments to be Overcome
There are two general kinds of difficulties when attempting to examine coop-
erative practices in the tramp sector. The first is sector-related, and the second
relates to the structure and application of EC Competition Law.

A. The Industry-Related Obstacles

a) Which are the Anti-Competitive Practices?
The main consequence of the 20 year “immunity” of the tramp sector is the
lack of information on forms of cooperation among tramp shipowners. Unlike

64
Guidelines, op. cit., para 20, TACA Decision, op. cit., paras 76–83, Commission Decision
2003/68/EC (Case Comp/37.396-Revised TACA), O.J. L 26, 31.1.2003, p. 53, para 39.
65
Decision 210/III/2002, a) Minoan Lines and Others, b) Minoan Flying Dolphins A.N.E.
(www.epant.gr), p. 27. The decision itself refers to the carriers’ inability to change lines due to
the licensing system applicable at that time. Besides, the decision distinguishes four product
markets in liner transport services depending on the speed and the technological characteristics
of the vessel. However this distinction responding to passenger transport features and the spe-
cific needs of the clients is not a priori applicable to the liner transport of cargo.
 competition in liner and tramp maritime transport services 87

liner agreements on which extended documentation has existed from the

middle of the last century,66 the European Commission had to launch a review
requesting, inter alia, clarifications on the operation of tramping, as only lim-
ited systematic knowledge was available.67 Unification of competition regime
will indirectly entail more transparency, to the benefit of the industry, because
the law enforcers will be in a position better to comprehend the specificities of
the sector.
According to the summary information provided by the Guidelines68 and
the more detailed analysis of recent sectoral studies, the main (but not exclu-
sive) form of prima facie anti-competitive agreements is the so-called “pool”.
It is again a generic term, embracing different types of looser or tighter coop-
eration which need to be assessed on a case-by-case basis. In its representative
form, it is an agreement by which shipowners operating similar vessels place
them under common commercial management and operation, which may
be carried out by the members themselves or by an appointed officer (the so-
called pool manager).69 The technical operation remains the responsibility
of each owner or is sub-contracted to ship managers. The tasks of the pool
officers include: administration, marketing and publicity, chartering and con-
tracting, operational tasks and accounts and finance.
Pools appear in some sub-sectors more often than in others.70 Normally,
they operate in specialized transport, in some commodities of liquid bulk71
and in dry bulk. The reason for their absence from other trades (DPP, LNG)
is not clear. Although market shares may not be calculated in abstracto but
only on the basis of the relevant market, it seems that the pools amount
between 3% and 15% of the corresponding commodity segment.72

66
See for example, the reference book by Marx, D., International Shipping Cartels: A Study
of Industrial Self-Regulation by Shipping Conferences, Princeton – New Jersey 1st ed., 1953.
More recently, CNUCED, Le système des conférences maritimes (rapport du secretariat), 1970
TD/B/C.4./62/Rev.1, Corbino, M.L., Il problema delle “conferences” marittime, ed. Padova,
1977, Sletmo, G. & Williams, E., Liner Conferences in the Containers Age. US Policy at Sea,
JC NY Mac Millan Publishing Inc. 1981, Herman, A., Shipping Conferences, LLP, London
1983, Egensperger, M, Les conférences maritimes, Thèse Paris I, 1986. Numerous articles and
papers have to be added to the above indicative list.
67
Coming from practitioners, i.e. Packard, W., Shipping Pools, LLP 1989. Cf. also for more
specialized aspects, Haralambides, H.E, The Economics of bulk shipping pools [1996] Mar.
Pol.&Mgmt 221–238.
68
Op. cit., paras 60 et seq.
69
Packard, op. cit., p. 6.
70
Information provided in Fearnley’s Report, op. cit., p. XI et seq. The Report has identified
27 liquid bulk pools, 12 dry bulk pools and 3 neo-bulk pools.
71
Chemicals, CPP, Crude Oil.
72
Fearnley’s Report, op. cit., p. 314 et seq. Such information has only relative value, if one
takes into account the difficulties in defining the relevant market, as pointed out above.
88 lia i. athanassiou

b) The Bad Precedent of the Liner Conferences

Even though the pools will be amply analysed in the next two chapters,73 it
becomes clear from the above summary description that one of their central
features is the common negotiation of freight rates. It is repeatedly indicated that
joint selling agreements have the object and effect of coordinating the pricing
policy of competing undertakings.74 The risk of drawing an analogy with the
price-fixing mechanisms and the collusion trends of the neighbouring liner
sector is thus apparent.
It is well known that the liner price-fixing cartels were granted by Regulation
4056/86 an unprecedented exemption, both wide and unlimited, under which
they have seen many suspect practices being legitimized and have even been
allowed to eliminate existing competition in the relevant market.75 This loose
regime did not hinder the abuse of collective dominance, repeatedly scruti-
nized by the Commission and the European Courts.76 In the post-conference
liner markets, previously tolerated cooperation agreements will be treated sus-
piciously, as breaching Art. 81 EC.77 Thus, horizontal agreements in tramping
with similar elements are likely to receive the same treatment, unless one
understands the differences. Besides, European competition law is in principle
and in general highly inimical to hard-core restrictions, mainly price-fixing
practices.

B. The Wide Scope of the Prohibition under Art. 81 EC

The European system of controlling restrictive agreements and concerted
practices is based on a two-step mechanism containing on the one hand a
wide prohibition (Art. 81(1)) and the possibility of exemption (Art. 81(3)).
All agreements having as their object or effect the restriction of competition
are caught, unless they qualify as “de minimis” agreements or they don’t affect
the intra-community trade. Obviously, agreements between non-competitors
or between competitors totally unable to provide the requested services

73
In both their cooperative and full-function versions (see Lorenzon, F. & Nazzini, R, Setting
Sail on a Sea of Doubt: Tramp Shipping Pools, Competition Law and the Noble Quest for
Certainty, infra, and Kolstad, O., Cooperate or merge? Structural changes and full-function
joint ventures in the shipping industry, infra).
74
Commission Notice “Guidelines on the applicability of Article 81 of the EC Treaty to hori-
zontal cooperation agreements” (2001/C 3/2), paras 144–145, Maritime Transport Guidelines,
para 66.
75
Athanassiou, G., Aspects juridiques de la concurrence maritime, op. cit., p. 151 et seq.
76
Joined Cases T-24/93, 25/93, 26/93 & 28/93, Compagnie maritime belge and others v.
Commission, [1996] ECR II-1201, C-395/96 P & 396/96 P, Compagnie maritime belge and
others v. Commission, [2000] ECR I-1365.
77
Cf. the assessment criteria provided by the Guidelines regarding information exchanges
between maritime operators (paras 38 et seq.).
 competition in liner and tramp maritime transport services 89

individually78 do not enter into the scope of the prohibition, but the useful-
ness of this escape is limited as such conditions are rarely met in practice.79
At this point, the enforcer has no tools with which to evaluate the market
effects of the conduct. Although the Commission has recently employed more
economic reasoning in assessing horizontal cooperation agreements, the per se
test continues to apply when a hard core restriction is in place.80 It is recalled
that a horizontal price or market-share constraint, explicitly referred to in Art.
81(1) EC as a core restriction, cannot benefit from the de minimis rule.81 The
strict view of the European Commission, not yet tested before the courts, is
not fully convincing. In fact, in American law, where fighting price-fixing
cartels was synonymous with the preservation of the public economic order
and the free play of market forces,82 a considerable evolution has taken place.
The history of judicial treatment shows that per se illegality as applied to hori-
zontal price constraints, although it has paid substantial dividends, has proven
unsatisfactory in a number of instances where conduct which might be labelled
“price-fixing” also may help to enhance economic efficiency. Thus a sliding
scale approach, focusing on the conduct’s economic impact, is progressively
gaining support.83
To overcome the rigid European assessment of horizontal cooperation in
price constraints when it proves to be an inappropriate tool for evaluating
business conduct, we need either to accept a more favourable and less
convincing legal qualification of the agreement (i.e. linking the price clause
with a joint production scheme84) or to proceed to a “harm vs. benefits” analy-
sis in the context of para (3).85 In the decentralized system introduced
by Regulation 1/2003, the latter option means that the undertakings and

78
Cf. for the necessity of the agreement in order to penetrate a new area, T-328/03, O2
(Germany) GmbH & Co. OHG v. Commission, [2006] ECR II-1231.
79
I.e. pool set up for the sole purpose of tendering for CoAs not accessible to individual
operators (Guidelines, op. cit, para 65).
80
Guidelines for horizontal cooperation agreements, op. cit., para 18.
81
Commission Notice on agreements of minor importance which do not appreciably restrict
competition under Art. 81(1) of the Treaty establishing the European Community (de mini-
mis) (2001/C 368/07), no 11.
82
United States v. Socony-Vacuum Oil Co. (1940) ref. by Gellhorn, E., Kovacic, W., & Calkins,
St., Antitrust Law and Economics, 5th ed., Thomson West, 2004, p. 217 et seq.
83
Gellhorn, Kovacic & Calkins, op. cit., p. 223 et seq.
84
Guidelines for horizontal cooperation agreements, op. cit., para 90 and Maritime Transport
Guidelines, para 62. The structure of pool agreements does not support the idea of joint pro-
duction. In most of them, it seems that pool vessels are hired to the Pool managing company
on the basis of a master “charterparty”, against ‘freight’ calculated as a percentage of the Pool
income. The Pool Company then administers and sells the chartered transport space on com-
mon terms.
85
Ibid, para 148.
90 lia i. athanassiou

their legal advisors are thus responsible for assessing whether the conditions
justifying the exemption are fulfilled.

2. Main Parameters of Assessment

The exemptability of a prima facie restrictive agreement in the tramp sector
(pool or not) is assessed ad hoc, taking into account its scope and functions. In
principle, there is anti-competitive agreement which, whatever the extent of its
effects on a given market, cannot be exempted provided that all conditions laid
down in Art. 81(3) are satisfied.86 For the cumulative fulfillment of these condi-
tions, one needs to focus on 3 elements, two external (the benefits and the mar-
ket power) and one internal relating to the indispensability of the restrictions.

A. Market Power
An agreement on joint determination of commercial aspects (including price)
may not be assessed without reference to market power on both the supply
and demand sides in combination with market structure. The market power
is important not only for the fulfillment of the fourth prerequisite of non-
elimination of competition, but also, in a more general way, for the under-
standing of the behaviour of the tramping undertakings.
Fixing prices logically involves suppliers having controlling power or at
least power on a substantial part of the market. If the parties’ actions cannot
affect prices, there is no reason for them to agree to fix them. Assessing market
power in practice requires consideration of the extent of competitive rivalry
within the relevant market and the competitive constraints upon firms from
outside the market.87 Degree of concentration is also important: the more
concentrated the market is (i.e. the liner sector), the more likely it is that it is
uncompetitive and vice versa. The less concentrated the market is, the less
likely is the risk of the collusion spreading.
Moreover, “fixing” means that suppliers are in a position to impose prices
on their clients. This cannot be ascertained without considering the buyer
power and the degree to which it may counteract the power of suppliers.88 It
is well known that in the liner sector there is an imbalance favouring the
carrier, as the consumers (in the sense of users) are numerous and less power-
ful; this inequality has from the early of last century justified the adoption of

86
T-17/93, Matra Hachette v. Commission, [1994] ECR -595, para 85. This starting point is
rightly emphasised in the final text of the Guidelines (para 72). Obviously, the greater the
restriction of competition, the greater should be the efficiencies and the consumers’ benefits.
87
Wish, op. cit., p. 43.
88
Cf. Notice on the Appraisal of Horizontal Mergers, OJ C 331/2008, p. 2002, paras
75–77.
 competition in liner and tramp maritime transport services 91

mandatory rules governing the obligations and rights of the parties to the
transport contract. On the other hand, in the tramp sector users of tramp
services (either cargo sellers or cargo buyers89) are frequently large industrials,
i.e. mining companies, oil companies, big manufacturers; such users are
normally able not only to negotiate but also to dictate prices by inviting bids
for long CoAs. The absence of mandatory rules regulating the contractual
relationship between the parties here is no surprise. In this normal situation,
ship operators do not literally fix prices but negotiate them individually or
collectively, and under competitive pressure from other competing bidders.
If investigation into market power and market structure had revealed such
collective negotiation not to have an adverse impact on competitive condi-
tions, the analysis would logically have stopped here. In fact, it is in the light
of Art. 81(1) EC that both the impact of agreement on existing and potential
competition and the competition situation in the absence of the agreement
need to be examined.90 However, this analysis is still ruled out for agreements
containing hard-core restrictions, such as those on price-fixing, market shar-
ing or the control of outlets.91 In such cases, restrictions need to be weighed
against their claimed pro-competitive effects only in the context of Art. 81(3).
This traditional reasoning requires the examination of two additional
elements.

B. Benefits
One can point to several expected benefits for the members of a pool: cost
savings through reduced duplication of resources, increased capacity utiliza-
tion and efficiency, reputation and public image allowing more profitable
employment for member vessels. The effort of cutting the costs of commercial
administration is not unique to tramp shipping. In several economic sectors,
we equally witness a sort of commercial management outsourcing in order
to take advantage of the existing networks, know how and organizational
structures.

89
Depending on the form of the sale contract.
90
T-328/03, O2 (Germany) GmbH & Co. OHG v. Comission, op. cit., para 71. See also
C-399/93, Oude Littikhuis and Others, [1995] ECR I-4515, para 10, where it is stated: “[i]t is
settled case-law that in defining the criteria for the application of Article 85(1) to a specific case,
account should be taken of the economic context in which the undertakings operate, the prod-
ucts or services covered by the agreements, the structure of the market concerned and the actual
conditions in which it functions” (in the same sense, T-328/03, op. cit., para 66).
91
T-148/89, Tréfilunion v. Commission, [1995] ECR-II 1063, para 109, T-374/94, 375/94,
384/94 and 388/94, European Night Services and Others v. Commission, [1998] ECR II-3141,
para 136.
92 lia i. athanassiou

Given the sensitivity of the European Commission in passing on benefits to

users in terms of price reductions,92 the argument will be more difficult to
prove for the reasons explained above. Rates are the result of negotiation, and
thus price fluctuations depend mainly on trade patterns and competitiveness
of the bids.
Qualitative benefits to users are more likely to be passed on to users and will
be easier to be proved by the undertakings concerned. For example, although
the demand side is mainly price-conscious, shippers of high-value commodi-
ties value reliability, security and continuity of service just as much, require-
ments to which the cohesive fleet of a pool is better placed to respond. The
ability to provide the level of service and scale required by major customers is
also suggested as an additional advantage, and it is at the origin of several
pools.

C. Indispensability
Indispensability of restrictions requires turning the investigation in the inter-
nal relationship of the contracting parties. Assessment will take place sepa-
rately for each restriction flowing from the agreement in question. Hard-core
restrictions are in principle unlikely to pass the test. Thus, to the extent that
the common bid is qualified as “price-fixing”, one can hardly see how this
constraint may be considered indispensable. Other clauses such as those on
non-competition, conditions of withdrawal, the obligation to enter all new
tonnage into the organization and the admission of new members93 are more
difficult to assess in abstracto. Even though the law enforcer is not well placed
to second-guess business decisions, it is important to know what the invest-
ment of the members is and the time needed to recoup it. Given the fact that
the service provided is not new, the industry changes are evolutionary and not
revolutionary, and the incentives for cooperation relate to trade fluctuations,
one can hardly see that this restriction is indispensable.

IV. Concluding Remarks

Regulation 1419/2006 brought the tramp sector effectively into the scope of
the EC competition rules. Although no competitive distortions have hitherto
been complained of by competitors or the demand side, it is necessary for

92
Bellamy & Child, op. cit., para 3.055.
93
About the content of the agreement and the possible clauses, see Packard, W., op. cit.,
p. 139 et seq.
 competition in liner and tramp maritime transport services 93

both the shipping industry and the competition policy makers and enforcers
to know each other better.
The 2008 Guidelines are intended to provide advice on the assessment of
the most frequent forms of cooperation in the tramp sector, i.e. pool agree-
ments. However, many questions remain in the grey area of doubt. Moreover,
the legal concept of per se illegality as traditionally interpreted in EC
Competition Law as well as the enforcement history in liner transport does
not seem to favour tramping. At the present stage, to the extent that the agree-
ments under examination involve hard-core restrictions, such as price-fixing,
they cannot benefit from any presumption of lawfulness. Thus, the burden is
upon the undertakings and their advisers to carry out an assessment of their
practice and ensure that it fulfils the conditions set out in Art. 81(3) EC.
It is suggested here that a clear understanding of the market structure and
of the power of the parties would help in clearly distinguishing the specific
characteristics of the sector being examined and in better evaluating the influ-
ence of the competitive conditions in order to come to a conclusion on the
beneficial or detrimental impact of the agreement.
It is worthwhile to note that the purpose of competition law is not to reduce
the adaptability of the sector to trade demands nor unreasonably to affect the
structure of the market. It has already been noted that, in the liner sector, the
repeal of the previous regime has shifted industry’s focus from conference to
information exchange agreements. The impact which competition policy may
have on the organization of the tramp market should not be underestimated.
Outlawing some forms of cooperation in tramp may give rise to greater con-
centration of movements or to the appearance of new business where large
undertakings will assume the task of commercial management of small and
medium shipowners, much like the service provided for its technical aspects
by ship managers. It is not certain that such alternatives will be more efficient
or will work better than the current cooperative forms in view of the social
welfare objective.
SETTING SAIL ON A SEA OF DOUBT: TRAMP SHIPPING POOLS,
COMPETITION LAW AND THE NOBLE QUEST FOR CERTAINTY

Filippo Lorenzon* and Renato Nazzini **

I. Introduction
II. Some Commercial Background to Tramp Shipping Pools
III. Tramp Pools: The Contract
1. The Structure of the Agreement
2. The Distribution of Profits
3. The Managerial Structure
A. Member-Controlled Pools
B. Administration-Controlled Pools
C. Agency Pools
D. Other Contractual Terms Causing Competition Concerns
IV. The Problem of the Competitive Assessment of Shipping Pools
V. Uncertainty as to the Objective and the Standard of Article 81 EC
1. Current Uncertainty in the European Union
2. The Position in the US
3. The Position in Other Jurisdictions
4. Multiplicity of Objectives and Legal Certainty
5. The Protection of the ‘Competitive Process’
6. Social Welfare
7. Case Law of the Community Courts
VI. Shipping Pools: An Infringement by Object?
VII. Conclusion

I. Introduction

This chapter discusses the contractual structure of tramp shipping pools and
whether they are likely to be an infringement of Article 81(1) EC by object.
While never formally exempted from the application of the EC competi-
tion rules, for a long time since the coming into force of the Treaty of Rome
tramp shipping services have been excluded from the scope of the regulations
implementing Articles 81 and 82. However, Regulation (EC) No 1419/20061

* Lecturer in law, Institute of Maritime Law, School of Law, University of Southampton.

** Reader in law, School of Law, University of Southampton.
1
Council Regulation (EC) No 1419/2006 of 25 September 2006 repealing Regulation (EEC)
No 4056/86 laying down detailed rules for the application of Articles 85 and 86 (now 81 and 82)
of the Treaty to maritime transport, and amending Regulation (EC) No 1/2003 as regards the
extension of its scope to include cabotage and international tramp services [2006] OJ L269/1.
 setting sail on a sea of doubt 95

extended the scope of Council Regulation (EC) No 1/20032 and Commission

Regulation (EC) No 773/20043 to include tramp vessel services as of 18
October 2006. On 1 July 2008, the European Commission, after a public
consultation, issued a set of Guidelines on the application of Article 81 of the
EC Treaty to maritime transport4 (the Maritime Transport Guidelines).
The problem of the assessment of shipping pools under Article 81 is novel.
This chapter focuses on a specific aspect of the application of Article 81(1),
namely whether shipping pools are likely to have the object of restricting
competition under this provision.
This chapter is structured in the following way. First, it examines the com-
mercial background to tramp shipping pools. Secondly, it analyses the con-
tractual relationships involved in a pool. Thirdly, it highlights the main issues
arising in the competitive assessment of shipping pools. Fourthly, it discusses
the uncertainty surrounding the objective and enforcement standard to be
applied under Article 81 and argues that this provision aims at maximising
social welfare through a consumer harm standard. Fifthly, it applies the con-
clusions reached in the discussion of the objective and enforcement standard
under Article 81 to the question whether shipping pools are an infringement
of Article 81(1) by object. Finally, it draws general conclusions.

II. Some Commercial Background to Tramp Shipping pools

Pooling agreements are a form of commercial co-operation between shipown-

ers clearly aimed at a more efficient, cost effective and lucrative deployment
of members’ fleet. In this respect the advantages of pools are clear5: a small
fleet of a few specialized vessels in the spot market may not meet the require-
ments to tender for big contracts of affreightment without exposing itself to
the commercial risks involved in buying second-hand ships, time chartering

2
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the
rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L1/1.
3
Commission Regulation (EC) No 773/2004 of 7 April 2004 relating to the conduct of
proceedings by the Commission pursuant to Articles 81 and 82 of the Treaty [2004] OJ
L123/18.
4
Guidelines on the application of Article 81 of the EC Treaty to maritime transport,
Brussels, 1 July 2008, SEC(2008) 2151 final (the Maritime Transport Guidelines).
5
For a fuller excursus on the historical development and the specific commercial back-
ground of tramp pools see Haralambides, H.E., The economics of bulk shipping pools [1996]
23(3) Marit. Pol. Mgmt., 221 (hereinafter “Haralambides”); Packard, W.V., Shipping Pools,
London, LLP, 1995 (hereinafter “Packard” ); AA.VV., EU Report COMP/2006/D2/002, Legal
and economic analysis of tramp maritime services (hereinafter “The EU Report 2006” ) available
on line at http://ec.europa.eu/comm/competition/antitrust/legislation/maritime/tramp_report
.pdf, and the fuller literature review contained therein at para [1781]ff.
96 filippo lorenzon and renato nazzini

other vessels or procuring for itself tonnage on the spot market. Moreover, to
comply with the time and capacity restrictions of such COAs, the manage-
ment will probably lack the flexibility required to charter out single vessels on
the spot market for the return trips, with a consequential increase in the
number of ballast voyages. The same is true for the bare spot market, where
it may be hard for a small fleet to coordinate efficiently subsequent charters
or to avoid part cargoes and deadfreight. This is due partly to the level of
marketability and exposure a small owner can achieve and partly to the flexi-
bility the chartering business is known to require from its supply side. These
difficulties may all be addressed by joining forces and pooling vessels together
under a sole commercial flag under the control of a central management. This
also has the collateral benefit of opening up the shipping industry to investors
who may wish to join the sector to diversify their portfolio but have no inter-
est in setting up an ad hoc commercial structure or buying in the necessary
expertise.6
A bigger fleet will certainly be able to invest more heavily in marketing its
services7 and react more quickly and effectively to the market’s demand,
achieving the necessary capacity to be able to spread its services among COAs
and subsequent voyage charters in a more coordinated and hence cost effective
and efficient manner. In this way, the trading performance improves and so
should the profit. However, not all shipowners – nor indeed all investors – are
keen on joining forces together permanently through full function joint ven-
tures, nor willing to leave full control of their entire fleets to external manag-
ers. Permanent solutions adopted in particular market conditions may in fact
turn out to be counterproductive as soon as the market conditions change,
and in a volatile market such as tramp shipping this would come as no sur-
prise. Against this background, pooling agreements are engineered to provide
the missing link: a way in which shipowners may achieve more efficient vessel
deployment by committing their fleet or part thereof to a pool of increased
capacity under a sole managerial structure on a temporary basis.
In order to assess the impact the EC competition rules may have on tramp
pools it is necessary to go into the details of the agreements on which these
pools are based and understand the way they are organized, structured and
run. In the following pages the analysis will focus on the structure of the
agreements themselves, the way money is distributed among the participants
(members) and the managerial structure of the pools.

6
For an overview on this matter see Packard, W.V., A pool’s value to financiers, in “Shipping
Pools”, Legal Studies and Services Ltd., London 16 February 1990, in particular at p. 5.
7
Nolan, C., Pool marketing activities, in “Shipping Pools”, Legal Studies and Services Ltd.,
London 16 February 1990; and Packard, p. 31.
 setting sail on a sea of doubt 97

III. Tramp Pools: The Contract

Pooling agreements are individually negotiated contracts tailored by the original

pool members to tally with the individual requirements of the forming pooled
fleet and those of the market in which the fleet is intended to operate. Thus
they vary very considerably in terms of managerial structure, profit participa-
tion formulas, standard forms chosen by the parties and indeed many of the
specific requirements for the pooled vessels and their operation. Although it is
certainly true to say that there is no such thing as a “standard pooling agree-
ment”,8 it is however not impossible to identify a number of features which
these agreements have in common,9 helpful to give them a broad classification
among other commercial contracts and necessary to address the competition
concerns presently at stake. Among the common features of pooling agree-
ments it has been considered essential to focus on three of their key elements:
1. the structure of the agreement itself; 2. the profit sharing and distribution
formulas; and 3. the possible managerial structures in which pools present
themselves. These features will be dealt with in turn.

1. The Structure of the Agreement

Broadly speaking the contract is formed by a pooling agreement (often referred
as framework agreement) stricto sensu, often incorporating a master charter,
normally on a time charter form of common use, duly amended with in-
house and/or special riders and a more or less complex series of annexes mainly
regarding the Pool Managing Company (PMC) and its regulatory framework
and the pool points and distribution formulas.10 But this structure may vary
significantly across the market. A comparative analysis of the various agree-
ments brings to light two quite distinct elements peculiar to these contracts:
(a) they appear to be principally aimed at preventing, or at least reducing,
potential conflicts within the pool and hence focus on the condition of the
fleet, the apportionment of money earned and the way in which the joint
business is to be run. That appears to be a determining factor for the complex-
ity of the agreements. But – this aside – (b) they are all contracts for the use –
in some form or other – of one or more vessels for a period of time and in
this – it is here submitted – they are remarkably similar to time charterparties
regulated by a framework contract.11 Looked at from this angle pool agreements

8
Packard, p. 117.
9
The EU Report 2006, para [970] and [1008]; and Haralambides, p. 221.
10
See again Packard, p. 117; and The EU Report 2006, para [1453] ff.
11
In a way which appears – although to a limited extent – not too dissimilar to the way in
which voyage charterparties are “framed” in contracts of affreightment.
98 filippo lorenzon and renato nazzini

may be regarded as very special time charters for a full (or part) fleet, where
the hire received by the owner is calculated as a variable share of the profits of
the PMC and the owner participates – although indirectly through being a
member of the PMC board – in the day-to-day commercial management and
employment of the vessel. This construction of the agreement – unorthodox
as it may seem – explains very intuitively the reason why pooling agreements
contain so much detail on the other two features discussed below: the formula
for distribution of revenue and the rules relating to the commercial manage-
ment and administration of the pooled fleet.

2. The Distribution of Profits

All pooling agreements contain – either in the text of the agreement itself or
attached thereto – a more or less complicated formula for the distribution of
profits. In this regard, the commercial purpose of the agreement is to combine
all earnings and expenses of the pool vessels as though they were one vessel
and to allocate them according to distribution formulas. Broadly speaking the
mathematics of this are quite complex: from the Pool Income (i.e. the gross
revenue from all pooled vessels) are deducted all pool’s Voyage Costs (or Pool
Expenses) such as bunkering costs, port charges and fees, fixed fees (hire deduc-
tions) and – in some cases – commission for the PMC. This Pool Revenue (the
difference between Pool Income and Pool Costs) is then distributed according to
distribution keys often based on Pool Points allocated to each individual vessel
(or member) on the basis of the performance achieved by each individual ship
over the pool accounting period (deducting ballast voyages and off-hire), the
age, capacity and performance of the vessel and a number of other factors
varying considerably among the different pools.12 In some – interesting – cases
the charter hire is paid to the owner as per charterparty but may be adjusted
annually by way of a compensation chamber; this allows the owner to rely on
a stable cash flow while getting the full benefit of the pool when (and if ) the
time for profit sharing comes. If the PMC has a credit vis-à-vis the member,
the compensation chamber of course works to the owner’s disadvantage.

3. The Managerial Structure

In terms of managerial structure – broadly speaking – pools have been divided
into two main categories: a) member-controlled pools and b) administration-
controlled pools.13 Recent studies have also identified a variant which may

12
See Priest, J.A., Pool accounting practices, in “Shipping Pools”, Legal Studies and Services
Ltd., London 16 February 1990; Packard, p. 37; and The EU Report 2006, para [981] ff.
13
Haralambides, p. 222.
 setting sail on a sea of doubt 99

be referred to as c) agency pools.14 The three different formats will be briefly

dealt with in turn.

A. Member-Controlled Pools
In member-controlled pools one or more dominant members manage the pool’s
fleet. Such dominant member may easily achieve a very similar result expand-
ing its own fleet by acquiring new tonnage or chartering it in on a time charter
basis. The advantage of doing it through a member-controlled pool appears,
however, to be considerable since an equivalent increase in tonnage corre-
sponds to a much smaller investment or indeed – when the charter hire is paid
through distribution of pool’s profit – no investment at all.15

B. Administration-Controlled Pools
The commercial philosophy of administration-controlled pools is completely
different and appears to be driven by a more genuine cooperative approach.16
In administration-controlled pools, the pool manager is a completely inde-
pendent company – the PMC – which is either participated in and owned by
the individual members who become members of its controlling body, or
totally independent of all of them.17 In the PMC, a Manager runs the day-to-
day business and a board meets at regular intervals to steer the company, as
any controlling body of a limited company would.18 As such the PMC is sub-
ject to the same regulatory framework as any other company incorporated and
operating in the relevant jurisdiction. The interrelated advantages of pools
over full function joint ventures in this case are clearly the flexibility of the
structure, its temporary nature, and the degree of operational management
and control which shipowners retain over their ships.19

C. Agency Pools
The analysis of individual agreements has also brought to light the existence
of pools where the PMC employs vessels as agent for the participants.20 This

14
The EU Report 2006, para [973].
15
Priest, J., Member controlled, in “Shipping Pools”, Legal Studies and Services Ltd.,
London 16 February 1990.
16
Haralambides, p. 222.
17
The EU Report 2006, para [973].
18
Jonsson, A., Administration controlled, in “Shipping Pools”, Legal Studies and Services
Ltd., London 16 February 1990.
19
For a useful explanation of the economics of administration controlled pools in particular
see again Haralambides, p. 225.
20
The EU Report 2006, para [973].
100 filippo lorenzon and renato nazzini

form of pooling – it is submitted – appears to be more of a variant of the

former two than an independent category insofar as the charterparty or COA
is formally concluded by the PMC as agent and hence it takes effect directly
between the charterer and the member. The managerial function, however, is
still allocated to the pool manager or the PMC as the case may be.

4. Other Contractual Terms Causing Competition Concerns

Pooling agreements generally contain a number of other clauses which may
raise competition concerns. A detailed analysis of each individual clause of
pooling agreements is beyond the scope of this chapter;21 however it is true to
say that non-competition clauses, termination provisions, lay-up clauses and
the various rules restricting access to the pool may all, either individually or in
combination with each other and the overall object or effect of the pool,
require a close examination under Article 81 EC or, more rarely, under Article
82 EC. As discussed below, the competitive assessment of individual clauses
and the pool as a whole is likely to be highly fact-sensitive and to turn on the
effects of the agreements in question on the relevant markets.

IV. The Problem of the Competitive Assessment of Shipping Pools

In a shipping pool, shipowners charter their ships to the pool in order to man-
age them jointly, achieve more efficient ship deployment, spread their risks
and maximise their profits. This business model may not only raise shipown-
ers’ profits as a result of increased efficiency but also have benefits for charter-
ers in terms of lower quality-adjusted freights.22 As a consequence, shipping
pools may be beneficial to society as a whole because they result in lower
quality-adjusted prices for the transport of goods by sea. On the other hand,
shipping pools may be a way for shipowners to increase their joint market
power in concentrated markets with high entry barriers. In these circum-
stances, enhanced market power is likely to result in productive and dynamic
inefficiency and higher quality-adjusted freights unless it is neutralized by
countervailing buyer power. While joint shipowners’ profits may still be higher
than in the counterfactual, social welfare is likely be to lower.
The analysis of whether shipping pools are beneficial or detrimental to soci-
ety in a competition law sense falls to be carried out under Article 81 EC. As
mentioned in the introduction, this chapter focuses on whether shipping
pools have the object of restricting competition under Article 81(1).

21
For a brief analysis of the most common pooling clauses see Packard, p. 117 and ff.
22
Quality-adjusted freights reflect the quality of the service provided at any given freight.
 setting sail on a sea of doubt 101

In the Guidelines on the application of Article 81 of the EC Treaty to mari-

time transport (the ‘Maritime Transport Guidelines’), the Commission takes
a formalistic approach to the issue, which results in very little guidance being
provided. At paragraph 62 of the Guidelines, the Commission says that the
‘key feature of standard shipping pools is joint selling, coupled with features
of joint production’.23 The Commission then refers to the Guidelines on hori-
zontal cooperation agreements as providing guidance on joint selling and joint
production. Finally, it concludes that ‘[g]iven the variation in pools’ character-
istics, each pool must be analysed on a case-by-case basis to determine, by
reference to its centre of gravity, whether it is caught by Article 81(1) and, in
the affirmative, if it fulfils the four cumulative conditions of Article 81(3)’.24
At paragraphs 144–145 of the Guidelines on horizontal cooperation agree-
ments, the Commission indicates that joint selling agreements have ‘as a rule
the object and effect of coordinating the pricing policy of competing manu-
facturers’. The reason is that joint selling agreements eliminate price competi-
tion between the parties and restrict output.25 The analysis is generally the
same even if the joint selling agreement is not exclusive.26 The same Guidelines,
at paragraph 90, describe the circumstances in which joint production agree-
ments ‘almost always’ fall within Article 81(1) and have the object of restrict-
ing competition.27 As expected, this is the case if the joint production
agreement fixes the prices of the products supplied by the parties, limits out-
put or shares markets. The Commission, however, adds an important qualifi-
cation. This strict standard does not apply if the parties agree on the output
directly concerned by the production agreement or if a production joint ven-
ture which also carries out the distribution of the manufactured products sets
the sales prices for these products, provided that the price fixing by the joint
venture is the effect of integrating the various functions.28
Both exceptions set out at paragraph 90 of the Guidelines on horizontal
cooperation agreements could apply to a shipping pool. By pooling their ves-
sels and agreeing on the way in which the vessels must be deployed, the parties
only agree on the output of the joint venture. Furthermore, the shipping pool
plainly carries out the distribution of the integrated service provided by pool-
ing the ships. The fact that the freights are set or accepted by the pool manager

23
Maritime Transport Guidelines, para 62.
24
Ibid.
25
Guidelines on the applicability of Article 81 of the Treaty to horizontal cooperation agree-
ments [2001] OJ C3/2, para 144.
26
Ibid, para 145.
27
Ibid, para 90.
28
Ibid.
102 filippo lorenzon and renato nazzini

may be seen as the effect of the provision of an integrated service. This analysis
applies, however, provided that ‘the centre of gravity’ of the pool leans towards
a production joint venture. If the ‘centre of gravity’ is that of a joint selling
agreement, paragraphs 144–145 of the Guidelines on horizontal cooperation
agreements suggest that the price fixing element of the arrangement means
that almost always shipping pools have as their object the restriction of
competition.
As regards this last issue, the Maritime Transport Guidelines do not provide
much clarification. At paragraph 62, they suggest that the joint selling ele-
ment may be the prevailing one,29 but then they indicate that the centre of
gravity of the pool must be identified, recognising that a case-by-case analysis
is required. Nor do the Guidelines say much more when discussing whether
pools have the object of restricting competition. At paragraph 66, the
Commission says that pool agreements between competitors limited to joint
selling as a rule have the object and effect of coordinating the pricing policy of
these competitors. However, the Commission has already recognised that
pools are not limited to joint selling, but also have some features of joint pro-
duction. The application of paragraph 66 presupposes that a pool can be cat-
egorised according to its ‘centre of gravity’ as joint selling or joint production.
As explained above, this key issue on which guidance should have been pro-
vided is left to a case-by-case assessment.
In conclusion, the Maritime Transport Guidelines do not provide any mean-
ingful indication as to the circumstances in which shipping pools may consti-
tute an infringement of Article 81(1) by object. The ‘price fixing’ element of
the arrangement, however, raises the stakes significantly in terms of risks for
the pool manager and the participating shipowners. Price fixing agreements
are among the most serious infringements of Article 81 and are rarely exempt
under Article 81(3). Even if an ‘exemption’ is possible, the burden of proving
that the conditions in Article 81(3) are satisfied lies with the pool manager or
the participating shiponwers. The Commission, a national competition author-
ity or a claimant in civil proceedings or arbitration has the burden of proving
only that the agreement is a price fixing agreement, regardless of the effects of
the agreement on the affected markets. If the shipping pool, on the other
hand, notwithstanding its ‘price fixing’ element, does not have the object of
restricting competition it will be prohibited under Article 81(1) only if it has
the (likely) effect of raising prices, reducing output, or slowing down the rate
of innovation. This is a heavy burden for the Commission, a national competition

29
Maritime Transport Guidelines, para 92.
 setting sail on a sea of doubt 103

authority or a claimant to meet. Only after proof of such likely effects is pro-
vided does the pool manager or the participating shipowners bear the burden
of proving that the conditions under Article 81(3) are satisfied.
The different characterisations of shipping pools as infringements by object
or agreements to be assessed based on their likely effects on the market cru-
cially depends on the objective and enforcement standard adopted under
Article 81. To give just one example, if the objective of Article 81 is to protect
the ‘competitive process’ as such, it is more likely that shipping pools will be
found to have the object of restricting competition. It is obvious that, by
entering into a pool, the parties cease to compete with each other, at least as
regards the pooled vessels, and coordinate their behaviour on the market. If,
on the other hand, the objective of Article 81 is to maximise social welfare in
the long term, then a shipping pool should be prohibited only if it is detri-
mental to society and, importantly, should be prohibited without an analysis
of its effects on the market only if it can be said to be almost certainly detri-
mental to society. However, it appears that, unlike in a naked cartel where
competitors agree among each other on the prices they will charge to their
customers, which almost certainty reduces welfare, a shipping pool is entered
into for prima facie competitive reasons. In other words, there is a plausible
efficiency reason for shipowners to enter into a pool agreement. The agree-
ment may be either beneficial or detrimental to society depending on the
circumstances. Under a social welfare objective, the appropriate standard
would appear to be an effects analysis under Article 81(1).

V. Uncertainty as to the Objective and the Standard of

Article 1 EC

1. Current Uncertainty in the European Union

The assessment of shipping pools under Article 81 is complex, not only
because of the novelty of the issue and the features of the markets affected, but
also as a result of the continuing lack of clarity as to the objective and scope of
Article 81. It is trite that competition law may be used to pursue different
objectives. This is because the concept of ‘competition’ is open-textured and,
therefore, different meanings may be ascribed to it depending on factors such
as the political environment, the prevailing market conditions and the current
economic and legal theories. However, only if the objective of competition
law, and of Article 81, is clearly defined is it then possible with a sufficient
degree of certainty to assess the lawfulness of complex agreements such as
shipping pools. It is possible that the reluctance of the Commission to give
clearer guidance on whether shipping pools are likely to have the object of
104 filippo lorenzon and renato nazzini

restricting competition is due, at least in part, to continuing uncertainty as to

the policy objective and the enforcement standard under Article 81. If the
same set of rules is used to pursue several objectives at the same time, uncer-
tainty is bound to follow.
A 2007 Report by the International Competition Network identifies ten
objectives of unilateral conduct rules.30 A number of ICN members empha-
sised that the objectives of unilateral conduct rules are the same as the objec-
tives of competition law more generally.31 The Report, therefore, may be used
as a starting point for a catalogue of the possible objectives of competition law,
including Article 81(1). The ICN report identifies the following objectives:
ensuring an effective competitive process, promoting consumer welfare, max-
imising efficiency, ensuring economic freedom, ensuring a level playing field
for small and medium-sized enterprises, promoting fairness and equality, pro-
moting consumer choice, achieving market integration, facilitating privatiza-
tion and market liberalization, and promoting competitiveness in international
markets. At least one further objective which was not explicitly addressed by
the respondents to the ICN questionnaire: maximising total welfare must be
added to this list.
The European Commission appears to support the view that the Community
competition rules serve a number of objectives, inter-related and compatible
with each other. The Maritime Transport Guidelines are silent on the objec-
tive of Article 81, but they refer to the Guidelines on the application of Article
81(3) of Treaty.32 The latter Guidelines state that the objective of Article 81 is
to protect competition on the market as a means of enhancing consumer wel-
fare and of ensuring an efficient allocation of resources. Competition and
market integration both serve the end of promoting allocative efficiency and
consumer welfare.33
The DG Competition discussion paper on the application of Article 82 of
the Treaty to exclusionary abuses makes a policy statement along the same
lines.34 The Guidelines on the Commission’s Enforcement Priorities in Applying
Article 82 to Abusive Exclusionary Conduct by Dominant Undertakings, as

30
International Competition Network Report on the Objectives of Unilateral Conduct Laws,
Assessment of Dominance/Substantial Market Power, and State-Created Monopolies, 2007 (herein-
after “ICN Report”), available on the ICN website. The Report is based on questionnaires sub-
mitted by thirty-five ICN members.
31
ICN Report, 6–8.
32
Maritime Transport Guidelines, para 5.
33
Communication from the Commission: Notice: Guidelines on the application of Article
81(3) of the Treaty [2004] OJ C101/97 (hereinafter “Article 81(3) Guidelines”), para 13.
34
DG Competition discussion paper on the application of Article 82 of the Treaty to exclu-
sionary abuses, Brussels, December 2005 (hereinafter “DG Competition discussion paper”),
available on the website of DG Competition, para 4.
 setting sail on a sea of doubt 105

the title already suggests, do not contain a statement of the law or policy but
do point to consumer welfare as the Commission’s objective in the enforce-
ment of Article 82.35
The Guidelines on the assessment of horizontal mergers36 and the Guide-
lines on the assessment of non-horizontal mergers37 are less clear in identifying
the objective of merger control. Both sets of guidelines, however, point out
that effective competition brings benefits to consumers, such as low prices,
high quality products, a wide selection of goods and services, and innovation.
The objective of merger control is to prevent mergers which would be likely to
deprive customers of these benefits by significantly increasing the market
power of undertakings.38 Both sets of guidelines expressly take into account
productive and dynamic efficiencies benefiting consumers.39 This approach
appears to be consistent with a consumer welfare objective.
The jurisprudence of the Community Courts is less clear in identifying the
objective of Community competition law. Different cases seem to suggest dif-
ferent objectives. In particular, it is not clear whether the Community Courts
are moving towards endorsing a consumer welfare objective or continue to
apply the idea that the competitive process is in itself an objective of competi-
tion law in an ordoliberal sense.
Two cases are illustrative of this tension. On the one hand, in GlaxoSmithKline
Services Unlimited v Commission, the Fourth Chamber (extended composi-
tion) of the Court of First Instance stated that the objective of Article 81(1) of
the EC Treaty is the protection of consumer welfare.40 On the other hand, in
British Airways v Commission, Advocate General Kokott stated that Article 82
EC, like the other competition rules of the Treaty, is not designed only
or primarily to protect the immediate interests of individual competitors or

35
Communication from the Commission: Guidelines on the Commission’s Enforcement
Priorities in Applying Article 82 to Abusive Exclusionary Conduct by Dominant Undertakings,
Brussels, 2 December 2008 COM(2008), not yet published in the Official Journal but available
on the website of DG Competition, paras 5–7.
36
Commission Notice: guidelines on the assessment of horizontal mergers under the
Council Regulation on the control of concentrations between undertakings [2004] OJ C31/03
(hereinafter “Horizontal Merger Guidelines”).
37
Commission Notice: guidelines on the assessment of non-horizontal mergers under the
Council Regulation on the control of concentrations between undertakings (hereinafter “Non-
Horizontal Merger Guidelines”) [2008] OJ C265/6.
38
Horizontal Merger Guidelines, para 8 and Non-Horizontal Merger Guidelines, para 10.
39
Horizontal Merger Guidelines, paras 12 and 76–88 and Non-Horizontal Merger Guidelines,
para 21, 52–57 and 115–118.
40
Case T-168/01 GlaxoSmithKline Services Unlimited v Commission [2006] ECR II-2969,
para 118, where the Court stated ‘the objective assigned to Article 81(1) EC […] is to prevent
undertakings, by restricting competition between themselves or with third parties, from reduc-
ing the welfare of the final consumer of the products in question’. The case is under appeal: see
Case C-501/06 P GlaxoSmithKline Services, [2007] OJ C42/11.
106 filippo lorenzon and renato nazzini

consumers, but to protect the structure of the market and thus ‘competition
as an institution’. Since where competition as such is damaged disadvantages
for consumers are also to be feared, in this way, consumers are also indirectly
protected.41 In its judgment, the European Court of Justice did not explicitly
endorse the Opinion of the Advocate General on this point. However, the
Court rejected British Airways’s plea that the Court of First Instance erred in
law by failing to examine whether the conduct in question in the case caused
prejudice to consumers as required by Article 82(b) EC. The Court pointed
out, relying on Europemballage and Continental Can v Commission,42 that
Article 82 EC is aimed not only at practices which may directly cause preju-
dice to consumers, but also at those which are detrimental to them through
their impact on an effective competition structure, such as is mentioned in
Article 3(1)(g) EC.43 This may be read as endorsing the objective of the pro-
tection of ‘competition as an institution’. However, it could also be interpreted
as requiring an analysis of market power from which consumer harm may be
inferred. This would be consistent with a total or consumer welfare objective
because market power, in the short term, is likely to reduce both total and
consumer welfare.

2. The Position in the US

In the United States, it is generally accepted that the goals of antitrust policy
are to prevent conduct which reduces consumer welfare.44 However, there is
also support for the view that the goal of antitrust policy is to prohibit con-
duct which reduces total welfare.45
The Department of Justice and the Federal Trade Commission apply a con-
sumer welfare test in merger control. The Joint Horizontal Merger Guidelines
state that mergers should not be permitted to create or enhance market power
or to facilitate its exercise. Market power to a seller is defined as the ability
profitably to maintain prices above competitive levels for a significant period

41
Case C-95/04 P British Airways plc v Commission, Opinion of AG Kokott delivered on 23
February 2006, [2007] ECR I-2331, para 68.
42
Case 6/72 Europemballage Corporation and Continental Can Company Inc v Commission
[1973] ECR 215, para 26.
43
Case C-95/04 P British Airways plc v Commission [2007] ECR I-2331, paras 103–108.
44
Lande, R.H., Wealth Transfers as the Original and Primary Concern of Antitrust: The
Efficiency Interpretation Challenged [1982] 34 Hastings LJ 65; Lande, R.H., Proving the
Obvious: The Antitrust Laws Were Passed to Protect Consumers (not Just to Increase Efficiency)
[1999] 50 Hastings LR 959; Salop, S.C., Question: What is the Real and Proper Antitrust
Welfare Standard? Answer: The True Consumer Welfare Standard, statement before the
Antitrust Modernization Commission, 4 November 2005.
45
Bork, R.H., Legislative Intent and the Policy of the Sherman Act [1966] 9 Journal of Law
and Economics 7.
 setting sail on a sea of doubt 107

of time. The result of the exercise of market power is a transfer of wealth from
buyers to sellers or a misallocation of resources.46 As regards efficiencies, the
Guidelines state that the Agencies consider whether cognizable efficiencies
would be likely to be sufficient to reverse the merger’s potential to harm con-
sumers in the relevant market, for instance by preventing price increases in
that market.47
As regards collusive behaviour assessed under section 1of the Sherman Act,
the US case law tends to focus on whether the behaviour under review increases
prices and lowers output. In Business Electronics Corp v Sharp Electronics Corp,
the US Supreme Court held that the per se prohibition applies to agreement
which would always or almost always tend to restrict competition and decrease
output.48 In Leegin Creative Leather Products, Inc v PSKS, Inc, the Supreme
Court explained that the rule of reason distinguishes between restraints with
anticompetitive effect which are harmful to the consumer and restraints stim-
ulating competition which are in the consumer’s best interest.49
As regards the analysis under section 2 of the Sherman Act, the case law is
also leaning towards a consumer welfare standard. In Brooke Group Ltd v
Brown and Williamson Tobacco Corp, the Supreme Court held that a danger-
ous probability of recoupment is a prerequisite for a finding of liability under
section 2 of the Act. Without recoupment, predatory pricing produces lower
aggregate prices in the market and consumer welfare is enhanced.50 Under a
total welfare standard, below cost pricing may be prohibited regardless of
whether recoupment is probable, as it is inefficient and may result in lower
total welfare.51
In United States v Microsoft Corp, the US Circuit Court of Appeals for the
DC Circuit held that, to be condemned as exclusionary, a monopolist’s act
must have an ‘anticompetitive effect’. Anti-competitive effect means harm to
the competitive process and, thereby, harm to consumers. In contrast, harm
to one or more competitors will not suffice.52 The Court went on to say that
if the plaintiff successfully establishes a prima facie case under section 2 of the
Sherman Act by demonstrating anti-competitive effect, then the monopolist
may proffer a ‘procompetitive justification’ for its conduct, for instance greater

46
US Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines
(rev ed 1997), reprinted in 4 Trade Reg Rep (CCH) § 13, 104 (8 April 1997), § 0.1.
47
US Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines,
§ 4.
48
Business Electronics Corp v Sharp Electronics Corp, 485 US 717, 723 (1988).
49
Leegin Creative Leather Products, Inc v PSKS, Inc 551 US (2007) nyr.
50
Brooke Group Ltd v Brown and Williamson Tobacco Corp, 509 US 209, 224 (1993).
51
Salop, S.C., Question: What is the Real and Proper Antitrust Welfare Standard? Answer:
The True Consumer Welfare Standard 6.
52
United States v Microsoft Corp, 253 F 3d 34, 58–59 (DC Cir 2001).
108 filippo lorenzon and renato nazzini

efficiency or enhanced consumer appeal. If the justification is not rebutted,

the plaintiff must show that the anti-competitive effect outweighs the pro-
competitive justification. The Court in the Microsoft case did not explicitly
and clearly address how this balancing exercise is to be performed. However,
it said that, for the conduct to be prohibited, the anti-competitive harm result-
ing from it must outweigh its pro-competitive benefit and that the focus must
be on whether the monopolist’s conduct on balance harms competition.
Because the Court defined anti-competitive effect and harm to competition as
harm to consumers, it may be inferred that the weighing-up of anti-competi-
tive and pro-competitive effects aims at establishing whether, on balance, con-
sumers are harmed.53

3. The Position in Other Jurisdictions

A number of other jurisdictions adopt other goals which are often said to be
compatible with the promotion of consumer welfare and economic efficiency.
In Germany and France, for instance, the protection of the competitive proc-
ess would appear to be a goal in itself, in line with Advocate General Kokott’s
Opinion in the British Airways case. In these jurisdictions, the protection of
economic freedom also plays an important role as an objective of competition
law.54 Furthermore, Germany regards the protection of small and medium-
sized enterprises as a goal of unilateral conduct laws.55
Australia, New Zealand and the Russian Federation regard market integra-
tion as an objective of their respective competition laws.56 In the European
Union, market integration has also been regarded as an objective of competi-
tion law in its own right. However, the Commission appears now to have
taken the view that market integration is relevant only insofar as it enhances
consumer welfare and promotes an efficient allocation of resources.57 Some
judicial pronouncements, however, suggest that market integration is still to
be considered an objective in and of itself.58

53
Ibid.
54
International Competition Network Report on the Objectives of Unilateral Conduct Laws,
Assessment of Dominance/Substantial Market Power, and State-Created Monopolies: Annex A:
Objectives of Unilateral Conduct Laws Identified in Agency Responses, 2007 (hereinafter “ICN
Report: Annex A”). The Response by the Bundeskartellamt to the ICN Unilateral Conduct
Working Group Questionnaire, 2006, suggests that the objective of unilateral conduct rules is
the same as the objectives of German competition law more generally (see, in particular, 2). So
does the French Response to the ICN Unilateral Conduct Working Group Questionnaire,
2006 (see, in particular, 3 and 4).
55
ICN Report: Annex A.
56
Ibid.
57
Article 81(3) Guidelines, para 13 and DG Competition discussion paper, para 4.
58
Case C-295/04 Vincenzo Manfredi v Lloyd Adriatico Assicurazioni SpA [2006] ECR
I-6619, para 38.
 setting sail on a sea of doubt 109

4. Multiplicity of Objectives and Legal Certainty

The review of the objectives of competition law carried out in the previous
section shows that often more than one objective is ascribed to competition
law in any given jurisdiction. Furthermore, there is no consensus internation-
ally on the main or primary objective of competition law.
The argument is often made that certain objectives of competition law are
not incompatible with each other. Therefore, it is entirely legitimate to say
that the objective of competition law is to protect the market mechanism in
the form of a competitive process. This, in turn, would increase consumer
welfare, ensure the efficient allocation of resources, and foster technological
progress and innovation.59 However, the better view appears to be that the
protection of the competitive process, total welfare, and consumer welfare
may not always be reconciled or pursued at the same time.
In reality, a multiplicity of objectives of competition law often results in
arbitrary decisions by competition authorities and courts. If different objec-
tives coexist and cannot be reconciled based on pre-determined criteria, and if
the outcome of a case depends, therefore, on which objective is pursued, cases
in which different objectives point in different directions will have to be
decided by selecting, explicitly or implicitly, one objective instead of the oth-
ers. This results in ex ante uncertainty and unpredictability for the parties.
The following sections illustrate this point by discussing the two main
objectives which may be assigned to competition law: the protection of the
‘competitive process’ and the promotion of social welfare.

5. The Protection of the ‘Competitive Process’

An objective often assigned to competition law is the protection of the com-
petitive process ‘as an institution’.60
The protection of the competitive process ‘as an institution’ raises a prelimi-
nary definitional problem because this objective appears to be indeterminate.
It is not possible to define what ‘competitive process’ means in a market con-
text without reference to a further definitional criterion.
The ‘competitive process’ may be defined as a process of rivalry among
firms on a given market. However, this definition does not provide a standard
for distinguishing between anti-competitive practices and innocuous or ben-
eficial behaviour. Even those who argue that competition law has the objective

59
ICN Report, 21–22.
60
This section discusses whether protection of the ‘competitive process’ is or should be the
objective of competition law. A different point is that the competitive process is the subject
matter of the assessment of collusive or unilateral conduct under competition law.
110 filippo lorenzon and renato nazzini

of protecting the ‘competitive process’ would agree that it is necessary to

introduce a further normative standard in order to establish whether the con-
duct under review is anti-competitive. Such a normative standard cannot be
the ‘competitive process’ itself, because this would not take the analysis any
further. Therefore, some other objective must be identified, such as the pro-
tection of competitors or a total or consumer welfare objective.
In practice, often the protection of the ‘competitive process’ results in a
policy in favour of market fragmentation which wrongly adopts the number
and size of independent undertaking on the market as a criterion for the
intensity of competition and the resulting benefits to society. Furthermore,
especially in mergers and unilateral conduct cases, the protection of the ‘com-
petitive process’ is often a form of protection of competitors in disguise.
An example will illustrate the potentially disastrous consequences of the
adoption of so vague a standard as the protection of ‘competition as an institu-
tion’. Let us assume that the transatlantic dry bulk market is highly frag-
mented on the supply side, with no individual shipowner or pool having a
market share exceeding 8% and with 5 shipowners or pools having a market
share in excess of 4%. If a number of smaller shipowners form a pool with a
combined market share of 4%, generally such an agreement would be unlikely
to have any detrimental effect to society. On the contrary, the pool may allow
the participants to compete more vigorously with the other larger pools or
shipowners for contracts of affreightment as a result of increased capacity and
more efficient fleet deployment. Furthermore, by sharing their know-how and
spreading individual risks, the participants may be able to compete more vig-
orously with the other shipowners and pools for time and voyage charters,
offering a better service and lower freight rates. As a consequence, the quality-
adjusted freights on the markets may be lower and society as a whole will
benefit. However, the idea that competition law has the objective of protect-
ing the ‘competitive process’ would result in the prohibition of the agreement
in question. A shipping pool clearly reduces, or even eliminates, competition
among the participants. Participating shipowners stop competing with each
other and agree, indirectly, on the freights they will charge to their customers.
This approach, however, is likely to result in significant harm to societal wel-
fare through both the prohibition of economically efficient conduct in the
case at hand (a false positive error) and the deterrence of such conduct in
other cases (over-deterrence).

6. Social Welfare
Economists and, increasingly, a number of competition authorities around
the world support a welfare objective as the goal of competition law. On
 setting sail on a sea of doubt 111

balance, economists appear to prefer a total welfare objective, which gives

equal weight to the surplus of producers and consumers in a given industry.61
Some economists62 and a majority of competition authorities around the
world63 appear to support a consumer welfare objective, which takes into
account only the surplus of consumers. At the theoretical level, the debate
between the proponents of the total welfare and the consumer welfare objec-
tive focuses on the desirability of taking into account distributional issues in
competition law.64 In practice, many competition authorities may prefer a
consumer welfare objective either for political and even populist reasons or
because a consumer welfare or, more precisely, a consumer harm standard is
held to be better suited to achieving the objective of maximising total welfare
and productivity in the long term.65
What seems clear is that, whether total or consumer welfare is the objective
of competition law, a welfare standard is necessary to distinguish which inter-
ferences with the competitive process are detrimental to society and which are
not. An exclusive focus on the competitive process ‘as an institution’ cannot
provide any meaningful guidance in this regard, and could result in interven-
tions which are seriously harmful to society.
The European Commission has stated that the maximisation of consumer
welfare is the objective of Article 81.66 If by this it is meant that consumer
welfare is the ultimate objective pursued by Article 81, this statement may not
be correct. No convincing argument has been advanced so far to justify why
the welfare of certain members of society does not or should not count, in
policy terms, as the ultimate goal of competition policy. However, it is possi-
ble that what the Commission really means is that Article 81 adopts a con-
sumer harm standard to assess whether conduct is prohibited or allowed. As
mentioned above, such a standard may be compatible with a total welfare
objective and could indeed be better suited to achieving the maximisation of
total welfare in the long term than a total welfare standard.

61
Ibid, 17–22.
62
Salop, S.C., Question: What is the Real and Proper Antitrust Welfare Standard? Answer:
The True Consumer Welfare Standard.
63
ICN Report.
64
Salop, S.C., Question: What is the Real and Proper Antitrust Welfare Standard? Answer:
The True Consumer Welfare Standard, Pittman, R., Consumer Surplus as the Appropriate
Standard for Antitrust Enforcement [2007] Competition Policy Intl, 205.
65
Farrell, J., Katz, M.L., The Economics of Welfare Standards in Antitrust, Paper CPC06-
061, 20 July 2006, Institute of Business and Economic Research, Competition Policy Center
(University of California, Berkeley); Lyons, B., Could Politicians Be More Rights than
Economists? A Theory of Merger Standards, Revised CCR Working Paper CCR 02-1, 15 May
2002, Centre for Competition and Regulation (University of East Anglia, Norwich).
66
Article 81(3) Guidelines, para 13.
112 filippo lorenzon and renato nazzini

It remains to be examined whether a consumer harm standard is supported

by the case law on Article 81 and, if so, what implications this has for the
competitive assessment of shipping pools under Article 81(1).

7. Case Law of the Community Courts

The case law of the Community Courts on Article 81 has traditionally fol-
lowed the Commission’s early approach in focusing on the limitation of the
‘freedom’ of action of market players67 or on market integration.68 However,
the case law has developed, in parallel, a doctrine of the analysis of the effects
of the agreement in its market context,69 an analysis which is close to a con-
sumer harm test. This doctrine has a number of strands.70
First, a number of cases require an assessment of the effects of the agree-
ment on the market under Article 81(1) in order to verify whether the restric-
tion of the parties’ freedom, or the restriction of rivals’ opportunities, is a
restriction of competition.71 While none of these cases explicitly adopts a con-
sumer harm test under Article 81(1), they often refer to parameters of compe-
tition such as prices, output and consumer choice, which are a proxy for
consumer harm.72
Secondly, other cases more explicitly consider the anti-competitive and
pro-competitive effects of an agreement on the market in order to assess the
overall net effect of the agreement.73 Again, these cases fall short of explicitly
adopting a consumer harm test, but they reject the ‘competitive process’

67
Case C-234/89 Stergios Delimitis v Henninger Bräu AG [1991] ECR I–935.
68
Joined cases 56 and 58–64 Établissements Consten S.à.R.L. and Grundig-Verkaufs-GmbH v
Commission [1966] ECR 299.
69
Case 56–65 Société Technique Minière (LTM) v Maschinenbau Ulm GmbH (MBU) [1966]
ECR 235.
70
For a comprehensive review of the case law until 2006 see Nazzini, R., Article 81 EC
between time present and time past: a normative critique of “restriction of competition” in EU
law’ [2006] CML Rev 497–536.
71
Joined cases T-374/94, T-375/94, T-384/94 and T-388/94 European Night Services Ltd
(ENS) v Commission [1998] ECR II-1533; Case T-65/98 Van den Bergh Foods Ltd v Commission
[2003] ECR II-4653, upheld on appeal in Case C-552/03 P Unilever Bestfoods (anciennement
Van den Bergh Foods) v Commission [2006] ECR I-9091; Case T-328/03 O2 (Germany) v
Commission [2006] ECR II-1231. The Community Courts occasionally revert to a more for-
malistic approach: see Case T-112/99 Métropole télévision (M6), Suez-Lyonnaise des eaux, France
Télécom and Télévision française 1 SA (TF1) v Commission [2001] ECR II-2459.
72
See, for instance, Case C-234/89 Stergios Delimitis v Henninger Bräu AG [1991] ECR
I–935.
73
Case 26 /76 Metro SB-Großmärkte GmbH & Co KG v Commission [1977] ECR 1875;
Case 42/84 Remia BV and others v Commission [1985] ECR 2545; Case 161/84 Pronuptia
de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis [1986] ECR 353; Case 258/78 LC
Nungesser KG v Commission [1982] ECR 2015; Case C-250/92 Gøttrup-Klim ea Grovvare-
foreninger v Dansk Landbrugs Grovvareselskab AmbA [1994] ECR I-5641.
 setting sail on a sea of doubt 113

rationale for the prohibition in Article 81(1). Restrictions of competition

are found to be lawful under Article 81(1) either because they are necessary
for the viability of a legitimate business transaction or because the restrictions
of intra-brand competition are outweighed by increased inter-brand competi-
tion, including through preserved or enhanced incentives to innovate.
Thirdly, in the GSK case, the Court of First Instance for the first time
explicitly adopted consumer welfare as the objective of Article 81(1) and, in
light of this, found that a restriction of parallel trade was not an infringement
of Article 81(1) by object.74 This judgment is under appeal to the ECJ.75 Any
conclusion to be drawn from it is, therefore, necessarily provisional. However,
if this approach were to be upheld by the ECJ, the GSK case would be
the high point, so far, of the development of the consumer harm test under
Article 81(1).

VI. Shipping Pools: An Infringement by Object?

The previous sections argue that social welfare is the objective of competition law.
As the CFI rightly held in GSK, the objective of competition law determines
the enforcement standards to be applied to actual cases, including whether an
agreement can be categorised as an infringement by object. This section applies
this analysis to the assessment of shipping pools under Article 81(1).
Shipping pools are not in any of the categories of clear-cut object infringe-
ments recognised so far by the Community Courts. In particular, they are not
naked cartels because the participant shipowners do not limit themselves to
agreeing in advance the level of freight they will charge to their customers.
Thy integrate their operations, at least to a certain extent, in order to achieve
a better deployment of the fleet, save costs, spread commercial risks, and com-
pete more vigorously against other shipowners and pools. These appear to be
plausible pro-competitive reasons for entering into a shipping pool, which,
depending on the circumstances of the market, may well result in lower
quality-adjusted freights to the benefit of society as a whole. It cannot be ruled
out that shipping pools have detrimental effects by increasing the parties’ joint
market power and allowing them to charge higher freights and lower the quality
of the transport services provided. The key consideration in determining
whether shipping pools are an infringement by object or may be an infringement

74
Case T-168/01, GlaxoSmithKline Services Unlimited v Commission, [2006] ECR II-2969.
75
Pending Case C-501/06 P GlaxoSmithKline Services, [2007] OJ C42/11.
114 filippo lorenzon and renato nazzini

by effect is, however, whether it can be assumed that, on average, the arrange-
ments in question are almost certainty detrimental to social welfare. It appears
that such an assumption would be unwarranted. In fragmented markets with
low barriers to entry, shipping pools may well have positive effects by increas-
ing, not restricting, competition. A per se prohibition under Article 81(1)
would have the disproportionate effect of discouraging pro-competitive
arrangements, with a likely negative effect on societal welfare. Nor is the pos-
sibility of an exemption under Article 81(3) such as to alleviate the concerns
in terms of over-deterrence which an over-inclusive prohibition by object
under Article 81(1) would cause. An agreement which has the object of
restricting competition under Article 81(1) is prohibited unless the parties to
the agreement prove that the conditions under Article 81(3) are met. This
would increase the legal risk of participating in a shipping pool with two pos-
sible consequences: either a beneficial, pro-competitive agreement is not
entered into at all, with a net welfare loss to society, or a beneficial, pro-com-
petitive agreement is entered into at a higher cost. In the latter case, the situ-
ation is optimal only if the higher compliance costs are justified by the gain to
society resulting from anti-competitive agreements not being entered into
because of the per se prohibition under Article 81(1). Given that shipping
pools have a plausible efficiency rationale, higher compliance costs are unlikely
to be justified.
The only argument which remains to support a categorisation of shipping
pools as infringement by object is a rather formalistic application of the con-
cept of ‘price fixing’. In a shipping pool the vessel is marketed by the pool. The
freight is set or ultimately accepted by the pool. The participating shipowners,
therefore, are not competing on price with each other.
This rationale for applying the per se prohibition of price-fixing under
Article 81(1) to shipping pools is not convincing. When price competition
among competitors is restricted by agreement – the ultimate evil in competi-
tion law – societal welfare decreases more than the joint profits of the parties
to the agreement increase. This is because there is, generally, no plausible effi-
ciency reason for a price-fixing agreement among competitors. However, this
applies to naked price-fixing, that is, a mere agreement among competitors to
raise prices or restrict output. These price-fixing agreements generally have no
plausible pro-competitive effects. Shipping pools are not agreements to raise
prices and restrict output. They are agreements to integrate capacity so that
ships can be more efficiently deployed. The fact that the pool is in control of
the fixtures, including the freights, is a necessary element of the integration
and joint provision of transport services.
 setting sail on a sea of doubt 115

VII. Conclusion

One of the main problems in the assessment of shipping pools under Article
81(1) is whether they constitute an infringement by object because they
restrict or eliminate price competition among the participant shipowners. The
Maritime Transport Guidelines are vague on the issue. They state that ship-
ping pools which are limited to joint selling normally have the object of
restricting competition,76 but they also recognise that shipping pools may
have some features of joint production.77 The Guidelines on horizontal coop-
eration agreements treat joint production differently from joint selling, and
indicate that in a joint production agreement a ‘price-fixing’ element is not
necessarily an infringement by object if the ‘price-fixing’ element is the effect
of the functional integration of the joint venture.
To clarify the position, it is useful to go back to first principles. Much of the
current uncertainty as to the assessment of shipping pools is the consequence
of the lack of certainty as to the objective of Article 81 and the standard for
prohibition under Article 81(1). This chapter argued that the objective of
Article 81 is social welfare and the standard under Article 81(1) is consumer
harm. A per se prohibition under Article 81(1) is only justified for types of
agreements which are almost certainly detrimental to social welfare. For such
agreements, typically naked cartels, the risk of over-inclusion, false positive
errors and over-deterrence are very low and far outweighed by the benefit of a
bright-line, easy-to-apply rule. It is doubtful, however, whether this rationale
applies to shipping pools. Shipping pools are not price-fixing agreements
because the restriction of price competition among shipowners is a necessary
consequence of the integration of capacity. The integration of capacity has clear
potential benefits on the tramp shipping market. It seems difficult to argue that
shipping pools are almost always detrimental to society. Nor is the analogy with
naked cartels any more plausible. As a consequence, the appropriate standard
for assessing the compatibility of shipping pools with Article 81(1) is a full
analysis of their likely or actual effect on price, output, and innovation.
Effects-based analysis under Article 81(1) may be complex and cannot be
carried out in the abstract. However, an effects-based analysis means that the
competition authorities (including the Commission and national competi-
tion authorities) and claimants have the burden of proving that the pool has a

76
Maritime Transport Guidelines, para 66
77
Ibid, 62.
116 filippo lorenzon and renato nazzini

likely or actual negative effect on the level of freights, the capacity on the
market or innovation. Only if the competition authority or a claimant proves
these anti-competitive effects to the required standard, the pool manager or
the participant shipowners will have to prove that the four conditions under
Article 81(3) are met.
It may be argued that this analysis does not offer much in terms of legal
certainty for the sector. However, this chapter concludes that shipping pools
are not an infringement by object under Article 81(1). In practice, this can be
described as establishing a ‘presumption of legality’ which can be rebutted
only by proof of likely or actual negative effect on price, output or innovation.
This is a heavy burden on a competition authority or claimant and should
provide a significant safe harbour for those shipping pools with no market
power which operate in highly competitive markets with low entry barriers.
Participating shipowners and pool managers are, however, not absolved
from carrying out a self-assessment of the compatibility of their shipping pool
with Article 81. Such an assessment is highly fact-sensitive and must have
regard both to the object and the effect of the pool as a whole and to the
object and effect of individual clauses.78 The ‘legal uncertainty’ which may
appear to result is simply a reflection of the thorough market analysis which
is required before a shipping pool can be held to infringe Article 81(1) as a
consequence of the ‘presumption of lawfulness’ of shipping pools under EC
competition law.

78
For a detailed analysis of the legal framework and the relevant factors to be taken into
account in the assessment of the object and effect of shipping pools and individual clauses
under Article 81, see Lorenzon, F. & Nazzini, R., Shipping Pools and EC Competition Law,
Kluwer Law Intl., The Hague, forthcoming.
 COOPERATE OR MERGE? STRUCTURAL CHANGES AND
FULLFUNCTION JOINT VENTURES IN THE SHIPPING
INDUSTRY

Olav Kolstad*

I. Regulation of Structure versus Regulation of Conduct

II. The Differences in Treatment of Joint Ventures under Article 81 and the MR
III. Will Article 81 Play a Role in the Regulation of Full-Function Pools?
IV. The Concept of Full-Function Joint Ventures and National Competition Law
V. Cooperation in Shipping Pools
VI. Full-Function Shipping Pools
VII. Joint Control
VIII. Internal Aspect: Independent Resources
1. Introduction
2. Human Resources
3. Must a Pool Own the Ships Necessary for its Business to be Full-Function?
4. Financial Resources
IX. External Aspect – Commercial Independence
1. Introduction
2. A Pool Must Operate in its Own Name
3. Is a Pool a Joint Sales Agency Ancillary to the Business of its Parents?
X. The Functions Must be Performed on a “Lasting Basis”

I. Regulation of Structure versus Regulation of Conduct

Shipping pools are a common form of cooperation in the shipping industry.

In a shipping pool independent shipowners bring together similar vessels to
be operated under a single administration. The primary task of a shipping
pool is to optimise the utilisation of the ships both commercially and techni-
cally. The commercial management of the ships is undertaken by the pool
manager, who markets the ships jointly. The manager concludes contracts
with the customers, and is responsible for the fulfilment of the contracts.
Normally the manager acts under the supervision of the vessel owners.
If shipowners in a shipping pool own similar vessels, i.e. vessels which
can be used to offer the same kinds of maritime transport, the owners are
competing suppliers of maritime transport services. A pool agreement will, if

* Professor, Faculty of law, University of Oslo

118 olav kolstad

it restricts competition between competing suppliers, be contrary to the

prohibition in Article 81.
A shipping pool may constitute a concentration falling within the Merger
Regulation (MR).1 It follows from Article 1 of the MR that it applies to all
concentrations with a Community dimension. Further, Article 3(4) states that
“The creation of a joint venture performing on a lasting basis all the functions
of an autonomous economic entity shall constitute a concentration within the
meaning of paragraph 1(b)”.
Thus, if a shipping pool constitutes a full-function joint venture with a
community dimension the creation of the pool falls within the scope of the
MR. This is because the pool will have a lasting impact on the structure of the
market in question and become notifiable as a concentration.
The regulation of conduct in Article 81 and the regulation of changes in the
market structure in the MR differ in many respects. This will be elaborated on
in Part II. These differences in treatment under Article 81 and the MR must
be taken into consideration when shipping companies plan to establish a pool,
and will answer the following question when they set up the pool: cooperate
or merge? Further, there may be pools which have existed for several years
which qualify as full-function shipping pools, even if the parties to the pool
primarily look at the pool as a contractual arrangement. If that is the case, the
fact that Article 81 can be applied to pools in all maritime transport services
sectors from 18 October 2006 will not influence the competition law assess-
ment of such pools.2
In what follows I will, based on the analysis of when a pool falls within
the MR as a full-function joint venture, identify when a pool is regulated
under the rules in the MR rather than under the rules on cooperation in
Article 81.

II. The Differences in Treatment of Joint Ventures under

Article  and the MR

The assessment of the effect on the market of the establishment of a shipping

pool will be different, and in certain aspects more advantageous, under the
MR from under Article 81.

1
Council Regulation 139/2004 of 20 January 2004 on the control of concentrations
between undertakings (MR), OJ 2004 L24 p. 1.
2
The question whether such pools should have been notified to the Commission under the
MR is not dealt with here.
 cooperate or merge? 119

First, under the MR a full-function joint venture is incompatible with the

common market if it:
“significantly impede effective competition, in the common market or in a
substantial part of it, in particular as a result of the creation or strengthening of
a dominant position”.
This is a higher threshold for intervention than “prevention, restriction or
distortion of competition” in Article 81(1). Two central aspects of a pool agree-
ment are joint production and joint marketing of the ships pooled. Agreements
on joint production and joint marketing between competitors are normally
considered serious anti-competitive practices restricting competition by object.
Rather than arguing that a pool agreement with clauses normally considered
to have great anti-competitive potential fulfills the criteria in Article 81(3), the
solution could be to try to get a shipping pool cleared under the MR.
In addition to a change in the market structure, a full-function joint venture
may lead to coordination of market conduct. This will be the case if the parents
use the joint venture as a mechanism for the coordination of their market con-
duct outside the joint venture. The parents may for instance use the joint venture
as a forum for the exchange of information relevant for competition between the
parents, and relevant for competition between parents and the joint venture. To
the extent that the creation of a shipping pool which constitutes a concentration
according to Article 3 has as its object or effect to restrict competition contrary
to Article 81, the shipping pool in question shall, according to MR Article 2(4),
cf. Article 2(5), be appraised under the criteria laid down in Article 81(1) and
(3). Thus, if there are elements of coordination connected with the creation of a
joint venture, the criteria laid down in paragraphs (1) and (3) of Article 81 are
added to the assessment of whether the joint venture results in a significant
restriction of effective competition under the MR. If a shipping pool aligns the
market conduct of the parties it can invoke the efficiency defence in Article
81(3) in the context of the MR. The one-stop-shop principle in Article 3(4) does
not extend to an express agreement between the parents to coordinate their
behaviour which is not directly related to and necessary for the establishment of
the joint venture.3
Secondly, a full-function joint venture falling within the MR shall be treated
according to the procedural rules in the MR, and will benefit from the more
stringent time limits in the MR. This means that the compatibility with the
competition rules of both the effect of the joint venture on the conduct of the
parties and the structural effects will be assessed in the procedure and pursu-
ant to the deadlines of the MR. Under Article 81 it is up to the parties to assess

3
Case IV/JV.22 Fujitsu/Siemens, para 77. See also Lindsay, A., The EC Merger Regulation:
Substantive Issues, second edition, London 2006, page 440, footnote 6.
120 olav kolstad

whether a pool agreement at any point restricts competition contrary to

Article 81(1), and whether the agreement result in efficiencies which can jus-
tify the agreement under Article 81(3). This assessment will often be a com-
plicated one.
Thirdly, the assessment under the MR will give the parties to a pool agree-
ment greater legal certainty. A clearance will be permanent, in contrast to the
general position under Article 81(3). An agreement is assessed under Article
81(3) in the actual context in which it occurs and on the basis of the facts
existing at any given time. An agreement will be covered by Article 81(3) only
as long as its four conditions are fulfilled. If the agreement at some time ceases
to fulfill one or more of the criteria in Article 81(3), the agreement will be
caught by Article 81(1).
Especially where the parties to a pool agreement allocate all their ships to
the pool, there may, from a competition law point of view, be good reason to
set up the pool as a full function joint venture.

III. Will Article 1 Play a Role in the Regulation

of Full-Function Pools?

The MR, as secondary legislation, cannot exclude the application of Article 81

to concentrations. According to the MR Article 21(1) implementing regula-
tion 1/2003 will not apply to concentrations. This means that to apply Article
81 to pools which constitute concentrations, the Commission must use its
powers under Article 85 to investigate possible infringements of Article 81 in
such pools. If a concentration has a Community dimension, the Commission
will always apply the MR. The Commission has never used its powers under
Article 85 to apply Article 81 to concentrations which have lacked a
Community dimension.4 It is thus very unlikely that the Commission will
apply Article 81 to full-function pools.
Article 81 is directly applicable in the Member States, and can be applied
by national courts even in the absence of implementing provisions. Based on
the fact that most Member States in Europe have their own national merger
control regimes, it seems unlikely that a national court would seek to override
a clearance given by any national competition authority.
It therefore seems safe to predict that Article 81 will play no role in the
regulation of full-function pools in Europe.5

4
Drauz, G. & Jones, C., EU Competition Law Volume II: Mergers and Acquisitions,
p. 6–7.
5
Cf. ibid, p. 7.
 cooperate or merge? 121

IV. The Concept of Full-Function Joint Ventures and

National Competition Law

To fall under the MR a pool must constitute a concentration with a Community

dimension. Article 1(2) sets out the thresholds, based on the Community and
worldwide aggregate turnover of the undertakings involved. If a concentra-
tion meets the thresholds in Article 1(2), only the Commission will have juris-
diction over it: cf. Article 21(1). National competition authorities can only
apply their domestic competition law to concentrations which do not have a
community dimension.
Only the largest pools will have a community dimension under MR Article
1(2). A concentration has a community dimension where the combined
aggregate worldwide turnover of all the undertakings concerned is more than
€5,000 million, and the aggregate Community-wide turnover of each of at
least two of the undertakings concerned is more than €250 million.
If national competition laws can be applied to a concentration this does not
mean that the distinction between full-function joint ventures and joint ven-
tures which are not full-function is irrelevant. Most of the Member States
have modelled their competition laws on the competition rules of the EC
Treaty. In the competition laws of the Member States one thus find rules on
conduct which mirror Articles 81 and 82 of the EC Treaty. The national rules
on mergers and concentrations are not “harmonised” with the rules in the
MR to the same extent. But the distinction in national competition laws
between conduct which is regulated by the national variants of Article 81 and
82 and structural changes which fall under the rules on merger control is simi-
lar to the distinction between “concentration” and conduct in EC competi-
tion law. In most cases a pool which constitutes a “concentration” under the
MR but does not have a community dimension will fall within the rules on
structural changes in national competition laws. The distinction between full-
function joint ventures and joint ventures which are not full-function will
thus be relevant also for the application of national competition laws.

V. Cooperation in Shipping Pools

A joint venture is an arrangement by which two or more firms come together,

pool their resources and integrate parts of their operations to achieve particu-
lar commercial goals.6 A shipping pool can be characterized as a joint venture
created to achieve more efficient fleet deployment and spread commercial

6
Jones, A. & Sufrin, B., EC Competition Law, 3rd edition 2007, page 1091.
122 olav kolstad

risk. The legal basis for a shipping pool is a pool agreement. A shipping pool
agreement can be defined in the following way:
“An agreement between a number of persons who have the right (because
they are bareboat or time charterers, so disponent owners) to exploit the earn-
ing capacity of similar ships to co-operate in the Commercial Management
and Commercial Operation of (typically) all such ships controlled by them
(whilst each retaining any responsibility which they may have for Technical
Operation). Various legal structures may be adopted, including the establish-
ment of a full-function joint venture “Pool Manager” to whom ships may be
time chartered, but the most important characteristic is agreement on a for-
mula (a “distribution key”) pursuant to which each ship shall earn from the
Pool a share in actual Pool net income (however defined) which is proportion-
ate to that ship’s agreed theoretical earning capacity, not its actual earnings in
the Pool (save insofar as there is provision for any adjustment, e.g. by way of
offhire, in respect of the operational risks retained by the “owners”). The Pool
Manager becomes a ship operator or disponent owner and has the right to
exploit the earning capacity of the vessel. No standard form documents in
popular use. No national regulation of detailed terms”.7
In the market, the result of a shipping pool agreement is that ships be-
longing to individual pool members are marketed through the same market-
ing organization. Based on the existing demand the pool will deploy the fleet
in a manner which achieves the highest commercial value for the fleet.
The individual shipowner may not have at his disposal enough ships to bid
for the fulfillment of CoAs of a certain size, or the individual shipowner may
feel the risks involved to be higher than he would normally be willing to
accept.8 When he pools his ships with the ships of other shipowners, the pool
can bid on CoAs which the individual member would not have bid on. From
the shipper’s point of view a pool arrangement can offer increased flexibility.
The pool can use a larger fleet to satisfy a single customer’s transport needs,
giving the individual customer more flexibility.
A pool will normally spread the risks connected with the entering into of a
mix of CoAs and open market charters.9 CoAs are normally entered into for

7
Definition given in a study on Legal and Economic Analysis of Tramp Maritime Services
produced by Fearnley Consultants AS, Global Insight and Holman Fenwick & Willan for
the European Commission. Annex 2 to the report with the definition can be found on
http://ec.europa.eu/comm/competition/antitrust/legislation/maritime/tramp_annex2.pdf
(visited 9.9.2008).
8
EU Report COMP/2006/D2/002, Legal and Economic analysis of Tramp Maritime
Services, para 961. The report can be downloaded from http://ec.europa.eu/comm/competi-
tion/antitrust/legislation/maritime/tramp_report.pdf.
9
EU Report COMP/2006/D2/002, Legal and Economic analysis of Tramp Maritime
Services, para 963.
 cooperate or merge? 123

maritime transport from A to B. If the ship is not going to sail empty from B
back to A the ship will have to enter into contracts, normally spot contracts,
with shippers in need of transport from B to A. A small or medium-sized
shipowner will seldom have the management or marketing organization nec-
essary to be able effectively to offer his ships to meet fluctuating demand in B.
On the other hand, a pool will be able to market the pool members’ ships
more effectively than they would be able to do alone, and in this way mini-
mize ballast legs. The pool will also be able to meet increases in demand more
effectively than its members would be able to do on an individual basis.
Through the establishment of a marketing organization and through the
technical management of a fleet of ships, a pool will be able to reduce its
members’ costs. In addition, the higher rate of utilization of the individual
ships through the pool will secure the members stable incomes. This again will
reduce the risks connected with large investment in new ships.
If the shipowners are operating similar ships, i.e. ships which can be used to
offer similar types of maritime transport, cooperating shipowners will align
their market conduct through the pool. In this respect the pool agreement will
be a horizontal agreement.

VI. Full-Function Shipping Pools

According to MR Article 3(4) “The creation of a joint venture performing on

a lasting basis all the functions of an autonomous economic entity shall con-
stitute a concentration within the meaning of paragraph 1(b).”
If the joint venture can act as an autonomous economic entity, and this is
done on a permanent basis, the creation of the joint venture will represent a
change in the market structure rather than an arrangement which aligns the
conduct of the owners through the joint venture. A joint venture which aligns
the market conduct of the parties to the joint venture agreement, without
giving the joint venture the autonomy to take independent decisions in the
market, can of course be said to alter market structure in the sense that it cre-
ates a new supplier or a new entity on the supplier side. But because of the
lack of autonomy the joint venture must be identified with the market con-
duct of the participating undertakings, and must be assessed under Article 81.
Article 3(4) MR describes the criteria for when a joint venture arrangement
results in a “real” change in market structure, rather than being a mechanism
for the alignment of market conduct.
To act as an autonomous economic entity a joint venture must be autono-
mous from an operational viewpoint. That the owners can influence the stra-
tegic decisions in the joint venture does not rule out the fact that the joint
124 olav kolstad

venture from an operational viewpoint acts as an independent entity. Another

solution would rule out a joint venture being jointly controlled by its owners,
which is a condition for a joint venture to amount to a concentration: see the
judgment of the CFI in Case T-282/02 Cementbouw v Commission:
“The fact that a joint undertaking may be a full-function undertaking and
therefore economically autonomous from an operational viewpoint does not
mean that it enjoys autonomy as regards the adoption of its strategic deci-
sions. The opposite conclusion would lead to a situation in which there would
never be joint control of a ‘joint undertaking’ as soon as it was economically
autonomous. The condition in Article 3(2) of Regulation No 4064/89 that
must be satisfied in order for the creation of a joint undertaking, that is to say
one controlled by two or more undertakings, to be considered to constitute a
concentration, namely that the joint undertaking must ‘[perform] on a lasting
basis all the functions of an autonomous economic entity’, proves that that is
not the case”.10
It follows from Article 3(4) that a full-function joint venture has two essen-
tial features: independence and permanence.
According to the Commission’s guidelines, the independence of the joint
venture refers to two fundamental aspects. First, the joint venture must be
equipped with sufficient resources of its own to conduct its business on the
market. Secondly, the joint venture must be commercially independent of its
parents. The aspect of internal independence will be discussed in chapter 8.
The aspect of external independence will be discussed in chapter 9.
To represent a change in the market structure, a joint venture must be of a
permanent nature. When a joint venture can be said to perform its business
on “a lasting basis” will be discussed in chapter 10.
It follows from Article 3(4) that the creation of a full-function joint venture
“shall constitute a concentration within the meaning of paragraph 1(b)”.
According to Article 3(1)(b) a joint venture must be controlled by one or
more undertakings in order to amount to a concentration. Thus, the creation
of a pool constitutes a concentration falling within the scope of the MR only
if one or more of its members are given control over the pool. If none of the
pool members are given decisive influence over the decision making process in
the pool, the creation of the pool will not amount to a concentration within
the meaning of the MR.
In this chapter I will focus on pools established by two or more shipowners
with the aim of marketing similar ships. For the creation of a pool of this type
to qualify as a concentration, two or more of the participants must jointly

10
Case T-282/02 Cementbouw v Commission, [2006] ECR, p.II-319 para 62.
 cooperate or merge? 125

control the pool. The criteria for joint control to exist will be dealt with in
chapter 7.
Article 3(4) does not explicitly regulate how a joint venture should be
organised to fulfil the criteria for full functionality, but it follows from the
concept in Article 3(4) that it should be structured in such a way that it has its
own legal personality. In what follows I will concentrate on shipping pools
organised as separate legal entities, most practically as companies. The pool
arrangement will thus be based on the agreement setting up the company, and
agreements between the owners on the decision making process in the
company.

VII. Joint Control

Control over an undertaking can be exercised through ownership shares or by

any other means, cf. Article 3(2):
“Control shall be constituted by rights, contracts or any other means which,
either separately or in combination and having regard to the considerations of
fact or law involved, confer the possibility of exercising decisive influence on
an undertaking”.
Two or more pool members have decisive influence when they can indi-
vidually block actions which determine the strategic decisions of the pool.11
Joint control is thus characterised by the fact that it is necessary for the owners
to reach unanimous decisions regarding the commercial activity of the pool.
If agreement is not reached this will result in a deadlock situation, where no
action can be taken. Decisive influence in connection with joint control thus
means the power to block strategic decisions.
The ownership share or the vote of an individual pool member is in most
cases dependent upon how many ships each member brings into the pool. As
an example, the ownership share of a pool member may be calculated on the
basis of the number of ships the pool member has entered into the pool rela-
tive to the total number of ships in the pool. More efficient ships, in most
cases newer ships, will contribute more to the pool than less efficient ships,
and this may influence the calculation of ownership share or votes.
Pool members which do not have a sufficient ownership share to exercise
decisive influence on the basis of their ownership rights can be given decisive
influence through other means, for instance shareholders’ agreements if the
pool is set up as a limited liability company.

11
If an owner has sole control he will have the power to determine the strategic decisions in
an undertaking.
126 olav kolstad

In pools with more than two members, where no member has 50 % or

more of the votes, no member will have a sufficient ownership share to exer-
cise decisive influence on the basis of ownership rights. Joint control must in
such cases be based on an agreement between the undertakings. Voting rules
giving each member decisive influence in the pool, in other words a veto right,
may be set out in the pool’s statutes. Another alternative often used in pools is
that a specific quorum, a pool committee, is set up. If each pool member is
given a veto right in the pool committee joint control will be established,
because decisions in the pool committee can be reached only on the basis of
unanimity.
If joint control is established on the basis of veto rights, the veto rights must
go further than veto rights normally accorded to minority shareholders in
order to protect their financial interests as shareholders.12 According to the
Commission, “veto rights which confer joint control typically include deci-
sions on issues such as the budget, the business plan, major investments or
the appointment of senior management” will typically be veto rights which
establish joint control.13 The members of a pool must thus be able to exercise
veto rights regarding decisions decisive for the strategy of the pool.
Long-term CoAs will be contracts of special importance for the running of
a pool. A long-term CoA means that one or more ships are secured engage-
ment for a long period. On the other hand, long-term CoAs may reduce the
flexibility of a pool, and thus the opportunity to take advantage of peaks in
the market with high rates. If the pool members are given a veto right regard-
ing “significant contracts” the pool management wants to enter into, it can be
argued that a veto right of this sort establishes joint control.

VIII. Internal Aspect: Independent Resources

1. Introduction
To be full functioning, a joint venture must be equipped with the resources
necessary to operate on the market in an independent and lasting manner
in competition with other suppliers. Thus, a joint venture must have the
resources (tangible and intangible) necessary to produce and offer the relevant
products to the market, and it must also have the human and financial
resources needed to do so. As a starting point, a joint venture must have access

12
Commission Consolidated Jurisdictional Notice para. 66.
13
Commission Consolidated Jurisdictional Notice para. 67.
 cooperate or merge? 127

to the resources necessary to conduct its business from the time it is set up
or shortly thereafter.14
A shipping pool offers services to the members connected with the market-
ing and management of their ships. As a service provider the pool mainly
needs sufficient human resources and offices.
As a supplier of transport services to shippers the pool must have sufficient
transport capacity, i.e. ships, at its disposal. To be able to offer transport serv-
ices on the market the pool needs an efficient marketing organisation. In addi-
tion, it needs an efficient technical and commercial management organisation
to fulfil the contracts it enters into.

2. Human Resources
As regards the human resources needed, a pool must employ the necessary
people to market ships, conclude transport contracts and manage the ships to
qualify as a full-function joint venture. The personnel should be employed by
the pool. If the pool is dependent upon personnel from the pool members to
operate its business, the pools business is an integrated part of the pool mem-
bers’ business rather than a separate business. This does not rule out a pool
from time to time hiring personnel from the members to work for the pool,
for instance in peak periods. In exceptional cases a pool may depend perma-
nently on personnel hired from one or more of the pool members for specific
tasks, for instance technical tasks.15 In such cases the joint venture’s manage-
ment must have authority over the employees seconded from the parent
companies.16

3. Must a Pool Own the Ships Necessary for its Business to be Full-Function?
To be full-function a pool must conclude transport agreements in its own
name and be liable for the fulfilment of the agreements. In many instances,
maybe in most cases, a pool does not own any of the ships it uses to fulfil
contracts of afreightment (CoA). Typically, a pool contracts ships on long-
term time charterparties mainly from the owners. The pool will prioritise

14
Cf. Commission Consolidated Jurisdictional Notice, para 94: “Full-function character
essentially means that a joint venture must operate on a market, performing the functions
normally carried out by undertakings operating on the same market. In order to do so the joint
venture must have a management dedicated to its day-to-day operations and access to sufficient
resources including finance, staff, and assets (tangible and intangible) in order to conduct on a
lasting basis its business activities within the area provided for in the joint-venture
agreement”.
15
Rhône Poulenc Chimie/Lyonnaise des Eaux (M.266, 1992).
16
Elf/Texaco/Antifreeze JV (M.1135, 1992).
128 olav kolstad

ships belonging to the members of the pool when it enters into long-term
contracts of afreightment. If a pool is in need of ships to fulfil contracts of
shorter duration it will often enter into short-term time charterparties mainly
with other shipowners.
If a joint venture does not control the tangible resources necessary, but is
dependent on its parents to have access to the resources necessary for conduct-
ing its business, it may be seen as lacking the independence necessary to be
regarded as a full-function joint venture. The question arises whether a pool
must own the ships it manages and operates.
It follows from the case law of the Commission that a joint venture may be
regarded as full-function even if the parent companies retain ownership over
production plants etc, but this situation must be based on objective reasons
and not last longer than necessary.17 The Commission accepted in Dupont/
Hitachi that it was sufficient for a JV to have strategic control over the produc-
tion centres to develop its activity, even if the JV did not own the production
centres, but hired them from the parent companies.18 The arrangement was
only for a transitional period of five years, but it can be argued that the
Commission’s reasoning can also be applied to arrangements of longer dura-
tion. In its decision the Commission placed decisive emphasis on the fact that
the JV from the outset acquired strategic control over the production facilities
and that they were dedicated to the JV. This is in line with the Commission’s
Consolidated Jurisdictional Notice, where the Commission states that it is
enough that the joint venture has “access” to sufficient financial and human
resources and assets.19 Ownership of resources transferred from the parent
companies seems not to be required.20
In Bramble/Ermewal/JV the question was whether a joint venture ( JV) per-
forming the leasing and the management of the parent companies’ tank con-
tainer fleets was full-function.21 The parent companies did not transfer full
ownership of their existing tank containers to the JV, but the JV leased the
tank containers from them. A management agreement entered into between
the JV and the parents gave the JV full rights to manage the containers. The
Commission found that the JV was a full-function joint venture covered by
the Merger Regulation.

17
Phillips Chevron Chemicals/JV (M.1966, 2000).
18
Dupont/Hitachi (M.994, 1997).
19
Commission Consolidated Jurisdictional Notice para 94.
20
Regarding intellectual property rights, it is sufficient that such rights are licensed to a joint
venture for its duration, Ericsson/Ascom (M.236, 1992) 11. It is not necessary to transfer intel-
lectual property rights to the joint venture. See also Thomson CSF/Deutsche Aerospace
(M.527, 1994).
21
Bramble/Ermewal/JV (M.2023, 2000).
 cooperate or merge? 129

To conduct its marketing tasks and the management of the ships, it is

normally not necessary for a pool actually to own the vessels it markets and
operates. But to utilise the portfolio of ships in the most efficient manner a
pool must, according to Bramble/Ermewal/JV, be able to control the ships
strategically and commercially. In other words, a pool should manage its own
“day-to-day” business affairs, including contracting.
Decisions relating to the long-term strategy of a company are in most cases
taken by the board. Decisions on overriding, strategic issues will normally
leave the implementation of the strategy decided upon to the administration
of a pool. The pool will still qualify as a full-function joint venture even if the
owners are actively engaged in its long-term strategy.
In some cases the owner of the ships wishes to retain control of how the
ships are utilised. As parties to the pool agreement the owners may wish to
influence the disposal of the ships as board members, or through a pool com-
mittee set up as a part of the pool. Approval from the owners as pool members
may for instance be needed for “significant contracts” or for contracts which
exceed a certain duration.
Contracts of special importance for the utilisation of one or more of the
ships in a pool not only are of special interest to the owners of the ships, but
will also be important for the overall business of the pool. For example, if the
market in question is characterised by large market fluctuations, a long-term
contract of afreightment may represent a considerable commercial risk for the
pool. The parties to a pool will thus have a legitimate interest as pool members
to influence the entering into of contracts of a certain magnitude. In my
opinion, if “significant contracts” have to be approved by the members of the
pool this is not contrary to the criterion that a pool must operate its own
day-to-day business. On the other hand, if the owners’ approval is required for
the “average” contract entered into by the pool, the owners will in reality
control the day-to-day business of the pool. The pool will then not be a full-
function joint venture.

4. Financial Resources
To be full-function, a pool must have sufficient financial resources to be finan-
cial independent of its members. If the financial resources a pool controls are
large enough to meet the pool’s financial needs in the short and medium term,
and enables the pool to invest in its business to improve its competitiveness,
the pool will have the financial resources necessary to act as an independent
supplier, and will in this respect be regarded as a full-function joint venture.
All the assets owned by the pool will be taken into account when assessing
whether it has a sufficient financial basis. If the pool does not have sufficient
130 olav kolstad

capital at hand, its working capital may consist of the ability to draw on a
credit facility guaranteed by the owners, provided that the credit is large
enough.
Most of a pool’s income will come from the fees received from the pool
members for the marketing and management of their ships. Such fees must be
higher than the amount necessary to cover the costs connected with the
running of the pool’s organisation.
The pool must be able to invest money in its business on its own initiative,
for example invest in new sales offices, data terminals or for other commercial
purposes. The pool must in other words have the autonomy to make invest-
ment decisions. If an investment decision must be approved by the pool, it
will not be a full-function joint venture. If the working capital of a pool con-
sists of a credit facility guaranteed by the owners the pool must be able to
make use of the credit without the consent of the owners.

IX. External Aspect – Commercial Independence

1. Introduction
To be viewed as commercially independent, a joint venture has to act as
an independent supplier and purchaser on an identifiable market on the
basis of its own commercial policy. To be a full-function joint venture a
pool must “operate its business on a stand-alone basis” and “interface directly
with customers and suppliers on the market”.22 The pool must be free to
decide the quantity and price of the products, and the customers to whom
it will sell.23 The pool members can thus not interfere in the daily manage-
ment of the fleet of ships, and cannot interfere in contract negotiations with
shippers.
Further, a joint venture must itself conduct all of the central tasks con-
nected with its business. It must undertake its own research, marketing, sales,
network operation, customer service, purchasing and internal functions. If a
joint venture does not enjoy operational autonomy, but is dependent upon
one or more of its parents to perform functions central to its business, the
joint venture will not be full-function.24

22
Reuters/Equant – Project Proton (M.1875, 2000).
23
Navarro, E., Font, A., Folguera, J. & Briones, J., Merger Control in the EU, 2nd edition,
Oxford 2005, page 43.
24
See Case T-87/96 Assicurazioni Generali SpA and Unicredito SpA v Commission of the
European Communities [1999] ECR II-203, para 71–77.
 cooperate or merge? 131

1. A Pool Must Operate in its Own Name

If a joint venture on the market is viewed as a separate and distinct entity from
its parents, this will indicate that the joint venture is an independent supplier.
A good indication of whether a pool operates on its own account is whether
the competitors of the pool view the undertaking as a distinct supplier in rela-
tion to its parents. In Astrolink the Commission used as an argument for full
functionality that all contracts were to be concluded in the name of the joint
venture.25 A shipping pool should thus conduct its business in its own name,
and itself handle all contacts with the customers. If there is contact between
the customers and the parties to the pool during negotiations, or when the
pool enters into contracts, or in connection with the fulfilment of the contracts,
this will indicate that the pool does not have full commercial autonomy.
Internally the pool members or the shipowners may decide whether con-
tracts of a certain magnitude should be entered into. Approval of significant
contracts may thus be needed. But no information should be given to custom-
ers regarding the approval process, except for standard conditions of board or
pool committee approval and similar conditions precedent. Further, no guar-
antees regarding the fulfilment of the contract should be given by the
shipowners.

2. Is a Pool a Joint Sales Agency Ancillary to the Business of its Parents?

If the business of a joint venture is ancillary to the business of its parents, it
will be found to fulfil only a specific function within their activity, and will
not be full functioning.26 If the joint venture sells its services only to the par-
ent companies, this indicates that its business is ancillary to that of its
parents.
In most cases a central purpose of the establishment of a shipping pool is
that it shall operate as the marketing organization for the pool members/
shipowners. If the activity of a pool is limited essentially to the distribution
or sale of the parent companies’ products, the Commission will consider it to
have only ancillary functions with respect to those of its parent companies,
to act as a joint sales agency, and not to be a full-function joint venture. Of
decisive importance are the functions the pool actually carries out in connec-
tion with its marketing activities. To be assessed by the Commission to carry
out full-functions on a distribution market, the joint venture must fulfil two
conditions.

25
Astrolink (M.551, 1995).
26
RSB/TENEX/Fuel Logistic (M.904, 1997), Unisource/Telefónica (M.544, 1995).
132 olav kolstad

First, the joint venture must have invested in the infrastructure necessary to
conduct its business such as sales outlets, terminals, sales personnel etc. Apart
from the ships, a pool must have ownership of all assets required to operate in
the market.
Secondly, the joint venture must obtain a significant proportion of its sup-
plies not only from the parent companies, but also from competitors of the
parent companies.27 An independent competitor will buy its goods from the
cheapest supplier at any time, whereas an exclusive preference for the products
of the parent companies indicates that the joint venture is just carrying out the
parent companies’ joint sales activities. In its Consolidated Jurisdictional Notice
the Commission states that: “In order to constitute a full-function joint ven-
ture in a trade market, an undertaking must have the necessary facilities and
be likely to obtain a substantial proportion of its supplies not only from its
parent companies but also from other competing sources”.28
The question is to what extent a pool can obtain supply of ships from the
pool members/shipowners.
Long-term charterparties expose a pool, because of possible market fluctua-
tion, to substantial commercial risk. Ships are normally very capital-intensive.
In many cases investors have no interest in building ships on speculation,
which means building ships without being confident that they have secured
the necessary cargo volumes to operate profitably. To be willing to invest in
new ships, an investor must have access to a marketing organisation with the
necessary software, systems and industrial customer base, which is of sufficient
size to operate profitably (critical mass). If investors do not have the necessary
access to a marketing organisation, they will not invest in and build ships on
speculation to explore the time charter market thereafter. On the other hand,
if it is not possible for a pool to contract ships on the same flexible conditions
as it has with its owners, taking into account the market fluctuations on the
markets in which the pool operates, it will not be economical for the pool to
invest in ships itself.
As was shown above in section VIII 3, it is not necessary for a pool to own
the vessels it operates to be regarded as full-function. Assuming that there is
no market in which the pool can contract ships on the basis of long-term
charterparties, other than from the pool owners, a requirement that a pool
must partly satisfy its need for transport capacity related to ships from other
sources than the owners would in reality force the pool itself to build and own

27
See for instance Texaco/Norsk Hydro (M.511, 1995), AgrEvo/Marubeni (M.788, 1996)
and ATR/BAe (M.551, 1995).
28
Commission Consolidated Jurisdictional Notice, para 102.
 cooperate or merge? 133

at least some of the ships it was going to manage. This would mean that the
pool would take an unnecessary financial risk, taking into account that the
pool can hire ships from its pool members. The financial risks in this case have
no bearing on the autonomy of a pool as long as the pool members are not
involved in the pool’s day-to-day business. Thus, it can be argued that as long
as a pool has full autonomy regarding the commercial operation of the vessels
it charters from its owners, this is decisive for the assessment of the pool as a
full-function joint venture. If there is no established market where the pool
could charter vessels on long-term charterparties from persons others than the
pool members, the fact that the pool members finance all the ships in a pool
does not preclude it from being regarded as a full-function joint venture.
In addition to the abovementioned requirements, the decisions of the
Commission show that a joint venture purchasing raw material or goods
included in the end product from its parent companies must add value to the
goods bought to be viewed as a full-function joint venture.29 If there is no
value added, this may indicate that the joint venture is a joint sales agency for
the parent companies. In Reuters/Equant – Project Proton the Commission
concluded that Proton was a full-function joint venture because Proton in the
near future was going to make substantial investments in its business, and
because Proton added substantial value to the products offered by Proton.30
The fact that a pool optimises commercial value for the pool members of
the ships in the pool is irrelevant in this context. The pool must add value to
the product from the customers’ point of view. If this is not the case the pool
will be viewed as a vehicle for the pool members to coordinate the marketing
and lease of their ships, and not as a full-function joint venture.
If a pool receives only a limited fee for the services rendered to the pool
members, this indicates that the value added by the pool is only the value of
the marketing services, i.e. the joint sales effort. This is too narrow a view. The
pool members may choose to take out the profits resulting from a pool’s busi-
ness and just leave a limited “fee” to the company. The question therefore, is
whether the customers receive a product of higher value to them as a result of
the pooling of the pool members’ business.
To be able to offer the transport volumes necessary, to have the necessary
flexibility and to be able to offer transport services with the efficiency required,
a pool must normally operate and manage a fleet of vessels. Only suppliers
which have reached a certain size, i.e. control a given number of vessels, which
operate an efficient logistic system and have invested in loading and landing

29
See for instance Union Carbide/Enichem (M.550, 1995) and Shell Chimiel/Elf Atochem
(M.475, 1994) and the Commission Consolidated Jurisdictional Notice, para. 101.
30
Reuters/Equant – Project Proton (M.1875, 2000).
134 olav kolstad

equipment are able to supply maritime transport services which fulfil the
needs of shippers in the most efficient manner. By managing and operating
ships of the pool members, a pool thus adds value compared to the situation
where the shippers would have to purchase transport services from smaller
suppliers.
Shippers in demand of short-term CoA do not have the same need for regu-
larity as shippers in demand of long-term CoA. But without cooperation
between the pool members, shippers of other types of carriages would be left
with a smaller supply of maritime transport services. It can thus be argued that
a pool will add value also to the shippers operating in the short-term or spot
market.
A pool often offers services such as port handling in addition to transport
services. If the additional services offered are viewed by the customers as
improving the product, i.e. the transport service offered, the pool also in this
way adds value to the “original” product from their point of view. The cus-
tomers themselves may in theory contract the additional services, but this
would be time-consuming and probably more expensive in total for the
customers of the pool.

X. The Functions Must be Performed on a “Lasting Basis”

To qualify as a full-function joint venture according to Article 3(4) of the MR,

a joint venture must perform all the functions of an independent undertaking
on a “lasting basis”. The financial and other resources committed by the pool
members to the pool will usually demonstrate whether the pool is meant to
conduct its business on a permanent basis.
If a pool is set up for an indefinite time, the pool agreement is indefinite,
and the criterion will clearly be fulfilled. It will not influence the assessment
that single pool members can step out of the arrangement if the day-to-day
business of the pool is left untouched by this. Similarly, new owners can be
admitted to the arrangement if they are let in on conditions which do not
change the autonomy of the pool.31
If the pool is set up for a definite period, this does not in itself exclude the
pool being set up on a lasting basis. In Lehman Brothers/Starwood/Le Meridien
the Commission found that a contract duration of 10–15 years was sufficient
to consider the joint venture yp have been set up on a “lasting basis”.32
A period of three years was not sufficient. In DaimlerChrysler/Deutsche Telekom/

31
See, e.g., Deutsche Bank/Commerzbank/J.M. Voith (M.891, 1997).
32
Lehman Brothers/Starwood/Le Meridien (M.3858, 2005).
 cooperate or merge? 135

JV 12 years was considered sufficiently long for a change of control on a lasting

basis,33 and in Deutsche Bahn/ECT International/United Depots/JV eight years
was considered enough.34
If an agreement is automatically extended the initial period will not be
decisive for the assessment of whether or not the joint venture is set up on a
lasting basis. In Lazard/Intesa/JV an initial agreement term of four years was
considered irrelevant as it was automatically extended.35

33
DaimlerChrysler/Deutsche Telekom/JV (Case IV/M.2903, 2003).
34
Deutsche Bahn/ECT International/United Depots/JV (M.2632, 2002).
35
Lazard/Intesa/JV (M.2982, 2002).
 PART II

COMPETITION IN THE PORT SECTOR AND IN SPECIFIC

MARKETS
 THE APPLICATION OF EC COMPETITION RULES TO THE
PORT SECTOR*

Lenita Lindström-Rossi**

I. Introduction
II. Market Access and Competition
III. Activities of the Port Infrastructure Manager
1. Access to Port Services
2. Access to the Port
3. Terms of Access to the Port
4. Cases Where no Infringement was Established
IV. Conclusion

I. Introduction

Ports play an important role in the efficient and smooth functioning of

maritime transport. They are also important as interconnection points between
different transport modes connecting maritime transport with the various
land transport modes used in the transport chain. Products and goods pass
through ports in different forms, such as containers or bulk. Ports in the EU
annually handle in total some 3.5 billion tonnes of cargo and 350 million pas-
sengers pass through EU ports. Their importance is also shown by the fact that
over 90% of EU’s trade with third countries and over 40% of intra-EU trade
is shipped through EU ports.
The ownership, organisation and financing of ports vary greatly in the EU.
The majority tend to be publicly owned, primarily by municipalities, and
many of them are city ports which make an important contribution to the
local economy.
While the EC competition rules also comprise State aid, this chapter deals
only with the antitrust provisions of the EC Treaty, i.e. Articles 81 and 82 EC.
This chapter attempts to explain the application of these rules to the port sec-
tor in the light of the existing jurisprudence of the European Courts and the
decision-making practice of the European Commission, as well as the role of
the anti-trust rules in the overall context of market access to port infrastruc-
ture and services.

* Senior case-handler, DG Competition, European Commission.

** This chapter puts forward the personal views of the author and cannot be considered as
representing the official position of the European Commission.
140 lenita lindström-rossi

II. Market Access and Competition

Many of the activities carried out in EU ports today, notably cargo-handling

services (loading/unloading of cargo, storage etc.), used to be carried out by
state-owned monopolies. In this context, it may be recalled that the EC Treaty
(Article 295) is neutral with respect to ownership. The EC antitrust rules are
applied to economic activities irrespective of whether they are carried out by
public or private entities.
Many services sectors especially network markets which used to be charac-
terised by the existence of state-owned monopolies, such as energy and tele-
communications, have been subject to EC legislation to open up the markets.
Following such liberalisation, which enabled other service providers to enter
the market, thus introducing competition, the EC antitrust rules have been
fully applied and enforced in these sectors, the aim being a well functioning
common market in the sector in which competition is not distorted. The leg-
islation has been drafted with a view to ensuring that public services continue
to be provided, and in the application of the EC antitrust law the European
Commission takes into account the special obligations placed on any entity
which benefits from special or exclusive rights and which is obliged to provide
services in the public interest. The transport sector has also been subject to
specific legislation opening up the market in the different transport modes
under the Transport Chapter (Title V) of the EC Treaty. However, no sector-
specific Community legislation exists for ports as explained below. The EC
antitrust rules nevertheless continue to apply to ports, and there are examples
where their application has led to opening up port services to competition.
EC antitrust rules govern anti-competitive agreements or concerted prac-
tices as well as abuse of dominant position by one or several undertakings.
Article 81 EC prohibits agreements between undertakings, decisions by asso-
ciations of undertakings and concerted practices which may affect trade
between Member States and which have as their object or effect the preven-
tion, restriction or distortion of competition within the common market.
Article 82 EC provides that abuse of a dominant position by one or more
undertakings within the common market or in a substantial part of it is pro-
hibited as incompatible with the common market in so far as there may be an
effect on trade between Member States.
Most cases where the EC antitrust rules have been applied to ports have
concerned abuse of a dominant position under Article 82 EC. It may be
recalled that the mere existence of a dominant position is not prohibited
by this provision, but merely the abuse thereof. As explained below in
more detail, the abuse has in many of these cases consisted of refusal by
ferry ports to grant access to a ferry operator or the imposition of unfavourable
 application of ec competition rules to the port sector 141

terms for granting such access (as a result of which the ferry operator has not
entered the market).
The European Commission can use different legal instruments to open up
markets to competition, including applying Articles 81 and 82 EC in indi-
vidual cases. In some of the cases on ports, Article 82 EC was applied in com-
bination with Article 86 EC. While Articles 81 and 82 refer to the behaviour
of undertakings, Article 86 is addressed to Member States and is applied only
in combination with another provision of the EC Treaty. Article 86(1) prohib-
its Member States, in the case of public undertakings and undertakings to
which they grant special or exclusive rights, from enacting or maintaining meas-
ures contrary to the rules of the EC Treaty and in particular the competition
rules. Article 86(2) EC concerns undertakings entrusted with the operation of
services of general economic interest, which are to be subject to the competition
rules of the Treaty only in so far as their application does not obstruct the
performance, in law or in fact, of the particular tasks assigned to them. The
European Court of Justice (hereinafter ‘ECJ’) has clarified that cargo-handling
services are not services of general economic interest (in the Merci case referred
to below), whereas the so-called technical-nautical services, i.e. pilotage, tow-
age and mooring in ports, may fall within this category provided certain con-
ditions are met. For example, the ECJ has indicated that mooring services
constituted a service of general economic interest (in the Corsica Ferries III
case referred to below).
The EC antitrust rules apply to economic activities. Entities which carry out
economic activities are considered to be ‘undertakings’ within the meaning
of EC competition law. While many port services are of an economic nature,
there are those which are not. In the Diego Calí case, which was a reference
for a preliminary ruling, the ECJ clarified that anti-pollution surveillance in
an oil port does not constitute an economic activity to which EC competition
rules would be applicable, even where this activity was entrusted to a private
entity by the public authorities and where the users were charged a fee to
finance that activity.1 In another preliminary ruling case, Jean Claude Becu,
Annie Verweire, NV Smeg and NV Adia Interim, concerning port activities
in the port of Ghent, the concept of ‘undertaking’ was raised under Articles
81, 82 and 86 EC.2 This case concerned Belgian legislation which reserved
dock work in port areas only to recognised dock workers and where the
conditions relating to the work were governed by collective agreements

1
Case C-343/95 Diego Calí & Figli Srl v. Servizi ecologici porto di Genova SpA, ECR [1997]
page I-1547.
2
Case C-22/98 Jean Claude Becu, Annie Verweire, NV Smeg and NV Adia Interim [1999]
ECR page I-05665.
142 lenita lindström-rossi

concluded on the basis of the law. The ECJ concluded that the recognised
dock workers performed the work for and under the direction of each of the
various undertakings in the port, as a result of which they were to be regarded
as ‘workers’ and could not in themselves be considered ‘undertakings’ within
the meaning of EC competition law. Hence, Articles 81 and 82 EC in combi-
nation with Article 86 EC were not applicable.

III. Activities of the Port Infrastructure Manager

Given that most port cases have involved an abuse of the dominant position
of the port (infrastructure manager), it is useful to look at how port activities
are organised and the role of the infrastructure manager. Indeed there is a wide
range of activities taking place in ports at various levels by different actors,
including several types of users of the infrastructure and services provided in
ports. Ports are managed by an infrastructure manager (hereinafter ‘port man-
ager’) usually under long-term concessions granted by the infrastructure
owner, usually the State or the municipality (unless the port manager is also
the owner of the port). In some cases, the port manager may manage several
ports. Concession is understood in this context as the allocation of a right to
build/use a port (infrastructure) for a certain period, which is usually fixed for
a long time, normally by the State or public authorities. The procedures for
allocating such concession in ports vary in the EU and depend largely on the
national rules in the Member States. Normally Community legislation on
public procurement applies only to concessions for public works, but not for
services. If any rules exist for the concessioned port infrastructure, they are at
the level of the Member States (and even if Community public procurement
legislation applied, such rules would concern the method of allocation, but
not the conditions attached to the concession). There are no examples under
the existing jurisprudence of the European Courts and the decision-making
practice of the European Commission where EC antitrust rules would have
been applied in situations relating to access to the market for the management
of port infrastructure.
The port manager is normally responsible for the use and financing of the
general infrastructure in the port. The infrastructure manager is also taking
decisions on (i) allocating the specific infrastructure/superstructure, such as quays
and terminals to various providers of port services (under concessions or
licences) which in their turn provide specific services to the end-users, i.e. the
vessels calling the port; and (ii) granting access to the port (infrastructure) and
often also providing some additional facilities and/or services to the vessels
calling the port. The range of facilities and services that the port manager is
 application of ec competition rules to the port sector 143

providing to end-users differs between ports; some port managers may decide
to provide the facilities and services themselves, whereas others may choose to
allocate these activities to third parties.
In order to finance its activities, the port manager raises revenues, inter alia,
by collecting a number of charges. Obviously the types of charges vary between
ports, but they can broadly be divided into two types: a) charges (concession
or licence fees) paid by the port services providers for the use of the infrastruc-
ture/superstructure that has been allocated to them and b) charges (port dues)
paid by the vessels calling at the port. The port manager is often setting the
level of the charges, but where the infrastructure manager is not the owner, the
charges may be fixed by the owner of the port, e.g. the municipality.
When looking at how the EC antitrust rules have been applied to different
port activities and the behaviour of port infrastructure managers in respect of
providing third party access to various services and to the port as such, one
may distinguish between: 1) access to the port services market; 2) access to the
port (infrastructure); and 3) (when access is granted) the terms of access
imposed on the vessels calling at the port. Below, an overview of the case-law,
including some cases where no infringement was found (section 4).

1. Access to Port Services

As mentioned above, there are no sector-specific rules concerning market access
to port services, such as the directive on groundhandling services in airports.3
The Commission has made attempts also to open up the port services market
through legislation; however, its proposal for a directive on access to the port serv-
ices market was rejected in January 2006 by European Parliament.4 This was the
second attempt by the Commission to achieve market liberalisation in this sec-
tor as the first draft directive was rejected by the European Parliament in
November 2003 by a narrow majority. One of the main objections to the pro-
posed directive related to self-handling, i.e. the ability to use ship-crew rather
than the established dock workers for cargo-handling, which was strongly
opposed by the trade unions. At present, ports therefore remain the only part
of transport which has not been liberalised through EU legislation.
The proposed directive was intended to cover in particular cargo-handling
services and technical-nautical services, i.e. pilotage, towage and mooring
provided in seaports which are open to commercial traffic. These are often

3
Council directive on access to the groundhandling market at Community airports (OJ L
273/36 of 25 October 1996).
4
Proposal for a Directive of the European Parliament and of the Council on market access
to port services, COM/2004/654 final – COD 2004/0240.
144 lenita lindström-rossi

mandatory services, at least for some types of vessels, e.g. oil tankers and bulk
carriers carrying dangerous goods. The purpose of the directive was to have a
Community-wide framework to ensure that the markets for port services
would be fully open e.g. by providing for open selection procedures (tenders),
thereby facilitating and encouraging new market entrants and existing service
providers to establish themselves in ports of their choice. The aim was to
establish a level playing field among port service providers in the EU, thus
stimulating cross-border activities and enhancing competition amongst them.
To open up the port services market would ensure the well-functioning of the
internal market also in the port sector by guaranteeing that the fundamental
freedoms, notably the right of establishment and freedom to provide services
were fully respected. While the draft Directive dealt with competition for
the market (tendering procedures etc.), the EC competition rules apply to
ports and port services primarily to ensure competition in the market although
they may also be used to open the market to competition, as explained
below. The two approaches may thus be considered to be to some extent
complementary.
In the absence of a common set of rules in the EU, there is wide diversity
in the way in which port services are organised and the procedure which
the port manager/port owner follows in selecting service providers. Various
restrictions therefore still exist in the field of port services, notably in the
form of exclusive and special rights. The market thus remains fragmented
and the degree of openness depends largely on national rules which vary
between Member States. Despite the lack of Community legislation to lib-
eralise port services, cargo-handling services in particular have, however,
gradually been opened up to a large extent, mainly as a result of the fierce
competition between ports for the provision of cargo-handling services,
especially for container traffic. One of the last Member States to open up
its cargo-handling services to competition was Italy as a result of actions by
the ECJ and the European Commission under EC antitrust law. This is
hence an example where liberalisation was achieved through the implemen-
tation and application of EC antitrust rules. In respect of the technical-
nautical services, i.e. pilotage, towage and mooring in ports, the situation
is more diverse (also there is less competition between ports for these
services).
Indeed, the monopoly on cargo-handling activities in Italian ports was broken
up following the ruling by the ECJ in the Merci case which was triggered by a
request for a preliminary ruling. While this case is not about access to the
cargo-handling market for cargo-handling companies, it is about the impact
on the end-users of the port of a non-liberalised cargo-handling market
 application of ec competition rules to the port sector 145

characterised by a monopoly.5 This is an important case on the application of

EC antitrust rules to ports. The issue at question arose in the context of an
industrial dispute in the port of Genoa as a result of a strike by the dock work-
ers who had a monopoly in carrying out cargo-handling in that port and a
shipowner, whose vessel could not be unloaded because of the strike (it was
unloaded only three months later), and who therefore brought an action for
damages before a national court, which referred the matter to the ECJ. At the
time, the Italian port system was characterised by a dual monopoly; one con-
cerning the organisation of cargo-handling (dock work) on behalf of third
parties, for which the monopoly company was required under Italian legisla-
tion to use the services of another company comprised of Italian dock workers
(the ‘dock-work companies’) who had the monopoly in actually carrying out
cargo-handling.
Following this ruling, the Italian port system was reformed by the abolition
of the monopoly; however, the dock-work companies retained the exclusive
right under Italian legislation to provide temporary labour to other cargo-
handling companies. This activity was subsequently the subject of another
ruling by the ECJ in the Silvano Raso case which was also a reference for a
preliminary ruling.6 The ECJ recalled that while the mere creation of a domi-
nant position by granting exclusive rights within the meaning of Article 86(1)
EC is not in itself incompatible with Article 82, a Member State is in breach
of the prohibitions contained in these two provisions if the undertaking in
question, merely by exercising the exclusive rights granted to it, is led to abuse
its dominant position or when such rights are liable to create a situation in
which that undertaking is led to commit such abuses. In this case there was a
conflict of interest for the former dockwork companies in that. while they
were competing with the other cargo-handling companies for the provision of
cargo-handling services, the former dockwork companies had an exclusive
right to provide temporary labour.

2. Access to the Port

There is no Community legislation regulating market access for the users of
the port infrastructure (such as the regulation on the allocation of slots in
airports).7 There has been no need to regulate this type of access in Community

5
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabriell SpA [1991]
ECR I-5889.
6
Case C-163/96 Silvano Raso and others, [1998] ECR page I-00533.
7
Council Regulation (EEC) No 95/93 of 18 January 1993 on common rules for the alloca-
tion of slots at Community airports, as subsequently amended, OJ L 14, 22.1.1993.
146 lenita lindström-rossi

ports notably because they – contrary to many airports – are rarely faced with
problems of congestion. As regards the application of EC antitrust rules to the
port sector, the majority of cases are decisions of the Commission taken in the
1990s and concern refusals by ferry ports to grant access to the port infra-
structure. In some cases, e.g. the port of Rødby, Article 82 was applied in
conjunction with Article 86 EC. In all these cases, except that concerning the
port of Roscoff (referred to below), the port had an interest in the incumbent
ferry operator and therefore wanted to exclude a potential competitor from
the downstream market (i.e. a conflict of interest).
It was in the case concerning the port of Holyhead, B&I Line plc v Sealink
harbours Ltd and Sealink Stena Ltd. in 1992 that the Commission for the first
time used the concept ‘essential facility’ (this case was settled, so it never went
to a final decision except for the interim measures).8 The conclusion that can
be drawn from this case is that the port manager/owner may not abuse its
dominance in neighbouring markets. Also, the Commission stated that a
company which both owns or controls and itself uses an essential facility, i.e.
a facility or infrastructure without access to which competitors cannot provide
services to their customers, and which refuses its competitors access to that
facility or grants access to competitors only on terms less favourable than
those which it gives its own services, infringes Article 82 EC where a competi-
tive disadvantage is imposed upon its competitor without objective justifica-
tion. In this case, the Commission used the essential facilities doctrine to open
up the market and encourage a new entrant on the ferry route where there had
previously been a monopoly. As an aside, it may be noted that B&I was already
operating on the route in question (this case could therefore be included under
section 3 below).
In another case involving the same port, Holyhead II: Sea Containers/Sealink,
the Commission in 1993 adopted a decision under Article 82 EC.9 Stena
Sealink was the owner and operator of the port and was providing ferry serv-
ices to and from Ireland. Sea Containers was a company operating ferries
which wanted to operate a fast ferry service on the central corridor route by
lightweight SeaCat catamaran. There was a series of negotiations between the
two companies but Sealink would not agree to the access which Sea Containers
wanted. Sea Containers complained to the Commission. However, the parties
came to an agreement, with Sealink offering access on terms which the
Commission considered to be reasonable and non-discriminatory, before the

8
[1992] 5 CMLR 255.
9
94/19/EC: Commission Decision of 21 December 1993 relating to a proceeding pursuant
to Article 86 of the EC Treaty (IV/34.689 – Sea Containers v. Stena Sealink – Interim measures)
OJ L 015, 18.01.1994 page 0008–0019.
 application of ec competition rules to the port sector 147

Commission reached any conclusion. Nevertheless, the Commission adopted

a decision with regard to the situation before the agreement, where it held that
Sealink was in a dominant position as the port authority on the British side of
the central corridor and that there was a sufficient prima facie case of a pattern
of behaviour constituting an abuse under Article 82 to order interim meas-
ures. In the end, no interim measures were ordered because of the develop-
ments which had occurred in the meantime. In 1992 the Commission received
a complaint by the Danish shipping line, Mercandia, against the Danish
Ministry for Transport concerning the refusal to grant access to the port of
Elsinore [Helsingør, (DK)]. The Commission considered that the refusal
would limit competition on the Elsinore (DK) – Helsingborg (S) route and
reinforce the dominant position held by Scandlines (jointly owned by the
Danish and German national railway companies) which operated on that
route contrary to Article 82 read in conjunction with Article 86 EC. The
Commission did not take a decision in this case since the Danish govern-
ment agreed in 1996 after intense negotiations to allow a competing ferry
operator (eventually Mercandia) access to the port following a public tender
procedure.
In 1993 the Commission adopted a decision concerning the port of Rødby
in Denmark following a complaint by a shipping company concerning the
refusal by the Danish government to grant it access to the port to operate a
regular ferry service between that port and Puttgarden in Germany.10 According
to the Commission’s letter of formal notice to the Danish government, the
effect of the refusal was the protection of the monopoly of the Danish and
German railways which at the time jointly operated a ferry service on this
route and which owned both ports. Such a refusal to grant access to the port
was considered incompatible with Article 86(1) in combination with Article
82 EC. The Danish government agreed to grant access. However, the shipping
company was subsequently refused access to the port of Puttgarden, which led
to proceedings in Germany. The German competition authority took a
decision in 1999 stating that the owner of the port of Puttgarden (Scandlines),
which is also operating a ferry service on this route, had abused its dominant
position by refusing to grant access. However, following an appeal and due to
procedural issues, access has still not been granted to this port.
The Commission took a decision ordering interim measures in 1995 in the
case concerning the port of Roscoff, a ferry port in Brittany, France, following
a complaint from the Irish ferry operator, Irish Continental Group (‘IGC’),
against the Chambre de Commerce et d’Industrie de Morlaix as the operator

10
Report on Competition Policy (1995), p. 120–121. OJ L55/52.
148 lenita lindström-rossi

of the port.11 IGC wished to start ferry operations between Brittany and
Ireland; the only company to operate a ferry service between Roscoff and
Ireland was Brittany Ferries. The Commission found that there was a prima
facie case that the Chamber of Commerce had abused its dominant position
by refusing ICG access to the port facilities there, in violation of Article 82
EC, and that serious and irreparable harm for the applicant would result. The
interim measures obliged CCI Morlaix to take the necessary steps to allow
ICG access to the port. However, the parties subsequently reached an agree-
ment concerning the conditions of access as a result of which ICG withdrew
its complaint.
While these types of cases are less likely to rise in the future in the light of
the settled case-law, there are still current investigations by national competi-
tion authorities of refusals by ferry ports to grant access to ferry operators.

3. Terms of Access to the Port

Once access is granted, there is also the issue of the terms on which access is
given. Indeed the terms imposed by the port manager have frequently been
the subject of complaints under EC antitrust rules, again under Article 82 of
the EC Treaty. Most of these cases have concerned discriminatory and/or
excessive prices charged by the port manager to the port users. In some cases,
the Commission did not take a final decision in the case because the parties
settled the dispute. In some instances, this may mean that the port manager/
owner may be able to impose a price which is very high, which may raise ques-
tions of its lawfulness. In the GT-Link case, the ECJ, following a request for a
preliminary ruling, held that excessive duties levied by a public undertaking
on a ferry company in breach of Article 82, in conjunction with Article 86
EC, must in principle be repaid.12 The ECJ left it to the national court to
determine whether the amount of the duty was actually unfair. If, on the other
hand, the terms are set by a public authority such as the Commission, this
authority is perceived as a price regulator (e.g. see the port of Helsingborg case
below).
The application of discriminatory pilotage fees was considered to infringe
Articles 82 and 86 EC by the ECJ in Corsica Ferries Italia Srl v Corpo dei Piloti
del Porto di Genova.13 The tariffs charged for pilotage services were lower for
vessels carrying out cabotage services (i.e. sailing between two domestic ports)

11
Irish Continental Group/CCI Morlaix – Port of Roscoff [1995] 5 CMLR 177.
12
Case C-242/95, GT-Link A/S v. De Danske Statsbaner (DSB) [1997] ECR I-4449.
13
Case C-18/93 Corsica Ferries Italia Srl v. Corporazione dei Piloti del Porto di Genova [1994]
ECR I-1783.
 application of ec competition rules to the port sector 149

than for those sailing between two Member States. However, only vessels
flying under the Italian flag were authorised to carry out cabotage and thus
benefitted from the lower tariffs. According to the ECJ, Italy had infringed
Article 82 in combination with Article 86 EC by approving the tariffs adopted
by the undertaking as it induced the undertaking to abuse its dominant posi-
tion by applying dissimilar conditions to equivalent transactions with its trad-
ing partners. The ECJ also noted that while the mere creation of a dominant
position by granting exclusive rights within the meaning of Article 86(1) EC
is not in itself incompatible with Article 82, a Member State is in breach of the
prohibitions contained in these two provisions if the undertaking in question,
merely by exercising the exclusive rights granted to it or if such rights are liable
to create a situation in which that undertaking is led to abuse its dominant
position.
On 21 October 1997,14 following a complaint, the Commission took a
decision requiring Italy to modify the rebate system applied to the pilotage
tariffs in the port of Genoa as it amounted to discrimination between mari-
time shipping companies for the same service to the benefit of national ship-
ping companies; a system which had already been condemned by the ECJ in
1994 in the above mentioned case.
The Deutsche Bahn case is another case of discriminatory pricing under
Article 82 of the EC Treaty which had an impact on competition between
ports for the transport of containers although the discriminatory charges were
not set by a port infrastructure manager.15 According to the decision of the
Commission in 1994, the German national rail operator has abused its domi-
nant position by applying lower prices for containers transiting via German
ports (Bremen and Hamburg) compared to Belgian and Dutch ports (Antwerp
and Rotterdam), thus favouring the former.

4. Cases Where no Infringement was Established

The exclusive rights and the charges for mooring services in Italy have been the
subject of a ruling by the ECJ in the Corsica Ferries III case.16 In this preliminary
ruling case, the ECJ established that mooring services are to be considered as
services of general economic interest within the meaning of Article 86(2) EC.
It concluded that national legislation which confers an exclusive right on
an undertaking for the provision of mooring services for which the service

14
Decision 97/745/EC, OJ L 301 of 5.11.1997.
15
Case T-229/94, Deutsche Bahn AG v. Commission [1997] ECR p. II-1689.
16
Case C-266/96 Corsica Ferries SA v Gruppo Antichi Ormeggiatori del Porto di Genova Coop.
Arl, Gruppo Ormeggiatori del Golfo di La Spezia Coop. Arl, Ministero dei Trasporti e della
Navigazione, [1998] ECR p. I-03949.
150 lenita lindström-rossi

provider can charge users is not contrary to Articles 81 and 82 in combination

with Article 86 EC. This is the case even if the price, in addition to covering
the actual cost of the service provided, includes a supplement to cover the
maintenance of a universal mooring service. The price was fixed by the local
maritime authority and the participation by the mooring groups in the admin-
istrative procedure for drawing up the tariffs could not be regarded as an
infringement of Article 81 EC in combination with Article 86 EC.
The issue of allocation of quays and self-handling has also been the subject of
a ruling by the ECJ in the Coe Clerici case.17 A shipping company, Coe Clerici,
had filed a complaint with the European Commission under Articles 82 and
86 EC on grounds that it had allegedly been denied the opportunity to use a
given quay in the port of Ancona for the loading/unloading of coal as a result
of the refusal by the port authority of Ancona to grant the necessary authorisa-
tion to carry out self-handling on this quay (for which a concession had been
granted to another company). The Commission did not consider that there
was a breach of Articles 82 and 86 EC in this case and rejected the complaint,
notably because of certain discrepancies concerning the facts, e.g. by arguing
that the quay in question did not constitute an essential facility as there were
other alternative quays which could be used. The decision was upheld by the
ECJ following an appeal by Coe Clerici.
The most recent case where the European Commission has applied the EC
antitrust rules to the port sector is the port of Helsingborg case.18 This case was
initiated on the basis of complaints by two ferry operators, Scandlines Sverige
AB and Sundbusserne, against the port of Helsingborg (hereinafter ‘HHAB’)
in Sweden alleging an abuse of a dominant position under Article 82 EC
notably in the form of charging excessive port fees. These ferry operators oper-
ated ferry services between Helsingborg (S) and Elsinore (DK) which is the
shortest crossing distance between Denmark and Sweden. After an in-depth
investigation, the Commission took two decisions on 23 July 2004 rejecting
both complaints, in which it concluded that, despite an extensive analysis of
the facts which involved an approximate cost calculation and efforts to find
benchmarks with other ports, there was insufficient evidence to conclude that
the prices charged by HHAB were unfair/excessive and thus constituted an
abuse within the meaning of Article 82 EC. These were highly complex cases
which show the difficulties in proving excessive prices under Article 82 EC
(especially in the absence of a benchmark) and for which the existing case law

17
Case T-52/00 Coe Clerici Logistics SpA v. European Commission supported by the port
authority of Ancona, [2003] ECR p. II-2123.
18
Commission decisions published on the internet at: http://ec.europa.eu/comm/
competition/antitrust/cases/index/by_nr_73.html#i36_568 and http://ec.europa.eu/comm/
competition/antitrust/cases/index/by_nr_73.html#i36_570.
 application of ec competition rules to the port sector 151

provides very limited guidance. It may be noted that after the Commission
decisions the parties reached a settlement.
In respect of the complainants’ arguments concerning excessive prices, the
Commission relied notably on the United Brands ruling of the ECJ where
excessive or unfair pricing abuse is defined as charging a price which bears no
reasonable relation to the economic value of the product/service supplied. The
ECJ lays down the following two-step approach to assess whether a price is
unfair: (i) determine whether the difference between the costs actually incurred
and the price actually charged is excessive and, if the answer to this question
is in the affirmative, (ii) determine whether the price imposed is either unfair
when compared to competing products/services or unfair in itself .19
The Commission first carried out an approximate cost calculation and alloca-
tion with a view to determining the relevant costs relating to the ferry opera-
tions since it found the proposed cost allocation by HHAB questionable. The
Commission carried out this task on the basis of the data available, mainly
from the audited financial reports. It was nevertheless a difficult task since
most of the costs of the port were fixed costs and, moreover, certain indirect
costs were not allocated by HHAB between the different categories of users,
i.e. the ferry operators on the Helsingborg-Elsinore route and the other users
of the port (notably cargo-vessels). Hence, the Commission had to apply a key
of repartition of these costs between the different users of the port. On the
basis of the approximate cost/price analysis, it appeared that the ferry opera-
tions seemed to generate profits, whereas, in general, the other operations of
HHAB generated losses. While the revenues (through port fees) derived from
the ferry operations would seem to exceed the costs actually incurred by the
port in providing services and facilities to these users, the Commission did not
draw any conclusion as to whether this difference could be considered exces-
sive (under the first step of the United Brands test), but proceeded to the
second step of the test, which consisted in determining whether the prices
charged to these ferry operators could be considered unfair when compared to
those of other ports or unfair in themselves.
A comparison of prices charged in different ports is very difficult, notably
because of the different characteristics of ports in terms of the facilities and
services provided which are covered by the port tariffs, charging methods
which are made complex also because many port users, including ferry-
operators, do not actually pay the public tariff but have separate agreements
with the ports. This was also the situation in the case at hand. The Commission
did, however, make an attempt to compare the prices charged by HHAB to
the ferry operators with fees charged (i) to the other users of the port, notably

19
Case 27/76 United Brands v Commission (1978) ECR 207, para 250–252.
152 lenita lindström-rossi

cargo vessels, (ii) by the port of Elsinore to ferry operators; and (iii) by other
comparable ferry ports to ferry operators. On the basis of these comparisons,
the Commission concluded that there was insufficient evidence to conclude
that the charges by HHAB to the ferry operators were unfair.
The Commission then tried to establish whether the prices could be consid-
ered unfair in themselves. In order to assess the economic value of the services
provided by HHAB to the ferry operators, the Commission took into account
all relevant economic factors (both cost- and non-cost-related), notably fac-
tors such as the sunk costs of HHAB and the intangible value that the location
of the port represents. On this basis, the Commission took the view that there
was insufficient evidence to conclude that the port charges would have “no
reasonable relation to the economic value” of the services and facilities pro-
vided to the ferry operators. Hence, the prices charged by HHAB could not
be found unfair in themselves.
Finally the Commission also dismissed the allegations by the complainants
concerning discriminatory port fees charged to ferry operators and cargo vessels
as well as allegations of cross-subsidisation between the cargo vessels and ferry
operators.

IV. Conclusion

The case law regarding access to ports, notably ferry ports, is well-established,
and it is unlikely that the Commission will handle many such port cases in the
future. Indeed following the modernisation of the implementing rules of
Articles 81 and 82 EC which became applicable on 1 May 2004,20 the major-
ity of port cases are dealt with by the national competition authorities or national
courts which are also competent to apply EC competition rules directly in
their investigations. Within the European Competition Network, there is
close co-operation between the Directorate General for Competition of the
European Commission and the national competition authorities to ensure an
efficient division of work and an effective and consistent application of EC
antitrust rules.21 As regards the application of EC antitrust rules to ports in the
future, most cases are likely to concern the conditions of access, such as fees
charged by the port manager to the users rather than refusals to grant access
to the port.

20
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the
rules on competition laid down in Articles 81 and 82 of the Treaty; OJ L 1, 04.01.2003,
p. 1–25.
21
Commission Notice on Co-operation within the Network of Competition Authorities,
OJ C 101 27.4.2004 p. 43–53.
 PUBLIC INTEREST VERSUS FREEDOM OF COMPETITION IN
SEA PORTS’ PRIVATIZATIONS: THE CASE OF GREECE

George Gerapetritis*

I. Introduction
II. Sea Ports Regulatory Framework
1. Does the Greek Constitution Reserves for the State the Provision of Sea Port
Services?
2. Does Community law Mandate the Liberalisation of Sea Port Services?
III. Monopoly against Liberalisation
1. Prerequisite for the Acceptance of a Monopoly in Community Law
A. Non-Discrimination
B. Abuse of Dominant Position
2. Liberalisation Restrictions in Greek Law
A. Transparency and Meritocracy in the Liberalisation Process
B. Establishment of an Anti-Trust Environment
C. Legal Supervision of the State
D. Legal Guarantee of the State
E. Obligation to Respect Human Rights
IV. Concluding Remarks

I. Introduction

The privatization of cargo handling at sea ports is one of those cases which
relate to more than one branch of law. This is where private, public and com-
munity laws coincide. It is, therefore, necessary to have recourse to commer-
cial and maritime law in order to establish good knowledge of the technical
aspects of sea ports’ activities, to the public law of privatisations in order to set
out the relevant limits upon the states and the conditions thereof and, to
Community law which supersedes domestic legislation and with which the
latter must be harmonized.
It has always been the case that cargo handling privatization is at the cutting
edge of political and social pressure, in such a way that any such regulatory
intervention has caused great anxiety. The reasons are the multiplicity of
financial administration models, the powerful private and public interests
involved and the variety of services provided within the ports.

* Ass. Professor of Constitutional Law, Faculty of Law, University of Athens.

154 george gerapetritis

First, there is a great diversity in terms of the regulatory regime of sea ports
in Europe. One may come across some general converging elements on a
regional basis, but it is impossible to draw homogeneous results as to the exist-
ence of a trend, let alone a single European model. This diversity obviously
favours inactivity, inasmuch there is no pressure to harmonise the different
regulatory models.1 Secondly, the actors operating in this market are extremely
powerful. On the one hand, there are entrepreneurs seeking the liberalisation
of markets in order to extent their profits and those engaged in maritime
activities potentially seeking the improvement of the services provided and, in
turn, if competition operates smoothly, a reduction in the relevant costs. On
the other hand, there are those working in cargo handling which have in the
main gained extensive working rights through their collective struggles and,
reasonably enough, wish public ownership and management to continue in
order not to jeopardize their rights. Thus, they reject the argument that good
management will produce growth and, consequently, create new jobs and
improve working conditions. The state stands as an arbitrator in this conun-
drum. However, the state is not an impartial actor, in that it has traditionally
controlled the functioning of sea ports and has raised the issue, especially in
Greece, to the level of vital importance for the national economy and safety
and the international status of the state.
Finally, the variety of the services provided by the port infrastructure man-
ager at sea ports renders the issue even more complicated. In the field there are
three distinctive sets of services: cargo-handling, technical-nautical services,
such as pilotage, towage and mooring, and, finally, support services, such as
fire brigade, fuel and water supply services, litter removal and storage.
In the case of the two biggest Greek sea ports, Piraeus and Thessaloniki,
currently undergoing privatization schemes, there is no properly understood
process of market liberalization, given that it would be practically impossible
due to space restrictions to provide a free competitive environment, or even to

1
The following extract from the Communication from the Commission to the European
Parliament and the Council – Reinforcing Quality Service in Sea Ports: A Key for European
Transport, COM(2001)0035 final is indicative: “The ownership, organisation and administra-
tion of ports vary between and within Member States, thus leading to great diversity in the port
sector. While accepting that it should be left to the Member States to decide upon the owner-
ship and organisation, a key issue from a competition point of view is the financial flows
between the public authorities, the port operators and the users of the port facilities and serv-
ices. Whilst in the past, ports and ports facilities were expected to be paid for by the taxpayer,
a discernible trend has developed towards greater private participation in their financing. As a
result, financing of many port facilities is increasingly becoming the responsibility of the private
sector, while the port authorities tend to restrict themselves more and more to their “landlord”
role and the financing and operation of those facilities which are essential to the safe and effi-
cient operation of the port as a whole. At the same time, more and more ports are seeking to
develop a more active commercial role, in cooperation with private partners inside and outside
the port. Indeed, some ports are operating entirely on a commercial basis”.
 public interest vs freedom of competition in sea ports 155

pass on cargo handling services to a large number of operators. In essence, it

is merely a public concession procedure, even though in the relevant tenders
there are certain clauses which clearly transcend the conventional boundaries
of a concession contract, thus regulating issues such as conditions of access to
the sea ports.2

II. Sea Ports Regulatory Framework

1. Does the Greek Constitution Reserve for the State the Provision of Sea Port
Services?
The Greek Constitution is neutral in terms of economy in the sense that it
does not impose a particular invariable economic model of the state–either
state interventionism or economic liberalism. There are however certain clause
which either fall into the human rights section or are more structural in nature
which give some guidance on the issue.
From the point of view of the protection of human rights, the Greek con-
stitution guarantees individual participation in economic life and the protec-
tion of individual property.3 Both these rights are subject to the general
restriction of the prohibition of abuse of conferred rights.4 Protection of
property is further subject to the compulsory purchase clauses, under which
expropriation is possible on grounds of public interest.5 Financial freedom is
further subject to the other constitutional clauses and the legislation stem-
ming therefrom, to general ethics and to the rights of others,6 whereas it is
explicitly provided that private economic initiative shall not be permitted to
develop at the expense of freedom and human dignity, or to the detriment of
the national economy.7
From the point of view of state organisation, the most prominent economic
clause is that proclaiming that in order to consolidate social peace and protect
the general interest, the state shall plan and coordinate economic activity in
the country, aiming at safeguarding the economic development of all sectors
of the national economy.8 However, the Greek courts, in order to define what

2
For the liberalisation process at the Port of Piraeus see Antapassis, A. & Athanassiou L., La
réforme portuaire hellénique eu égard au droit communautaire: L’exemple du port du Pirée
[2000] Il Diritto Marittimo 368.
3
Articles 5 para. 1 and 17 para. 1 of the Constitution respectively (all citations refer to the
Greek Constitution of 1975 as amended in 1986 and 2001).
4
Article 25 para. 1 of the Constitution.
5
Article 17 para. 2 of the Constitution.
6
Article 5 para. 1 of the Constitution.
7
Article 106 para. 2 of the Constitution.
8
Article 106 para. 1 of the Constitution.
156 george gerapetritis

belongs to the state, normally have recourse to more general constitutional

values, such as the principle of popular sovereignty,9 in the sense that sover-
eignty is curtailed if some activities are operated by individuals, and the prin-
ciple of separation of powers,10 in the sense that the executive power of the
Government and the President of the Republic cannot be deprived of its
essential constitutional competence.
The relevant case law in relation to which services necessarily belong to the
state is clear, albeit fluid. Clear in the sense that it states categorically that
there are certain services which exercise powers attached to the core of the
state and, therefore, which can lie only with the state or a public law entity.
Fluid because it is impossible to draw a fixed line round what constitutes the
core of the state. Understandably, at times, the core may expand or contract
(in contemporary times only the latter occurs), depending on the prevailing
ideological notions of each era. Thus, although in 1998 the certification of
traffic violations by private policemen was deemed to violate the core of the
state’s activities, 11 in 2002 the responsibility vested in private policemen to
control people and baggage at airports was considered to comply with the
Constitution.12
In the light of the above, in the case of public enterprises which do not
belong at the core of the state, such as the sea ports’ cargo handling, the legis-
lator may assess which is the optimum organisational model to serve public
interest and arrange the legal format of the operator, by setting up either a
public enterprise or a private company or by conceding the service to a private
company.13

2. Does Community Law Mandate the Liberalisation of Sea Port Services?

Given that 90% of the products exported to third countries and 30% of intra-
Community trade passes through European ports, the European Union could
not remain inactive in cargo handling privatisation schemes. However, there
is no specific antitrust legislation in the field at a European level, unlike in
other sectors of community interest, such as telecommunications, water and

9
Article 1 para. 3 of the Constitution.
10
Article 26 para. 2 of the Constitution.
11
See the authority decision 1934/1998 of the Plenary of the Greek Council of State («CS»)
concerning concession of police powers to non-public servants.
12
CS 3946/2002.
13
CS 159/92, CS (Plenary) 3818/1997, CS 1999/2000, CS 1511/2002. Furthermore, not
only the form of the operator but also the very process of legal transformation in the manage-
ment of the service belongs to the discretion of the legislature, which cannot be controlled by
the courts unless there is manifestly authoritarian or unsuitable to achieve a public interest
purpose, see CS 1511/2002 and CS 4229-30/1995.
 public interest vs freedom of competition in sea ports 157

energy, and also other activities in the field of transportation.14 For sea port
operation a directive on enhancing port security was enacted,15 which never-
theless brought nothing new to the issue of the management of sea ports.
As early as 1997, the Commission issued a Green Paper on sea ports and
maritime infrastructure,16 aiming at harmonising domestic legislation with a
view to liberalising the relevant markets. In March 2001, the Lisbon European
Council called on the community organs and the Member States to acceler-
ate the procedures of liberalising sea ports, and this trend was confirmed by
the Barcelona European Council a year later, which set out a deadline of the
end of 2002 for adopting regulatory measures. Within this period, the
Commission lodged the first package on access to port services, which
included a draft directive to that effect. When the draft directive was brought
before the Parliament, it was significantly enhanced with competition rules.
Although it took three years of negotiations amongst the representatives of
the Parliament and the Council, the draft directive was eventually rejected by
the Parliament on November 23, 2003. A year later, the Commission came
back with a new draft directive which, however, had the same unfortunate
fate in January 2006. In fact, port management constitutes the only part of
transportation which today remains completely unregulated by secondary
Community law.
In order to inquire whether this area falls within the ambit of Community
law two questions ought to be answered. The first is whether sea port services
constitute an undertaking in terms of community law and, if the answer is in
the affirmative, whether these services constitute undertakings for which ‘spe-
cial or exclusive rights’ may be granted under Article 86(1) of the Treaty or
entrusted with the operation of services of ‘general economic interest’ or have
the character of a ‘revenue producing monopoly’ wuthin the meaning of
Article 86(2) of the Treaty, in which case the subjection of these services to
competition rules occurs ‘in so far as application to these rules does not
obstruct the performance, in law or in fact, of the particular tasks assigned to
them’.
From the point of view of Community law, there is a significant difference
in the legal treatment of the various port services. The Union tolerates trade
restrictions in technical-nautical services, given that there is no reaction to the
fact that pilotage services in most European ports are provided in a state of

14
The most relevant being Council Directive 96/67 of the 15th October 1996 on access to
the groundhandling market at Community airports, OJ L 272, 25.10.1996, p. 36.
15
Parliament and Council Directive 2005/65 of 26th October 2005, EE L 310, 25.11.2005,
p. 28.
16
COM(97) 678 final.
158 george gerapetritis

monopoly essentially run by state authorities, whereas towage and mooring

services are provided by individuals or privately owned enterprises, albeit
mostly in a state of monopoly or oligopoly. By the same token, the ECJ’s case
law has implied that certain support services attached to public interest pur-
poses, such as par excellence the supervision and prevention of pollution in
ports, do not constitute financial functions as properly underrstood.17 By way
of contrast, the Community organs have explicitly taken the stance that cargo
handling is clearly a commercial activity which falls within the ambit of
Community law, thus being subject to antitrust regulation.18 Accordingly, in
the light of Article 86(2), in order to deviate from the rule stemming there-
from, it is not enough that the public power has assigned to a private entity a
service of general economic interest, but also that the development of trade
must not be affected to such an extent as would be contrary to the interests
of the Community.19 As explicitly ruled by the ECJ, sea port functions do not
in principle entail a general economic interest and do not posses particular
characteristics which make these services distinct from other commercial serv-
ices so as to be in a position to be subject to Article 86(2). This stance is
strengthened by the assertion that the general prerequisite that the develop-
ment of trade must not be affected to such an extent as would be contrary to
the interests of Community law is by nature an element which is very difficult
to prove by a state claiming the exemption of Article 86(2). Understandably,
the ECJ when dealing with such cases is rather reluctant to embrace relevant
arguments.20

17
See Case C-343/95 Diego Calì & Figli Srl v Servizi ecologici porto di Genova SpA (SEPG)
[1997] ECR I-1547, paras. 22–23: “The anti-pollution surveillance for which SEPG was
responsible in the oil port of Genoa is a task in the public interest which forms part of the
essential functions of the State as regards protection of the environment in maritime areas. Such
surveillance is connected by its nature, its aim and the rules to which it is subject with the
exercise of powers relating to the protection of the environment which are typically those of a
public authority. It is not of an economic nature justifying the application of the Treaty rules
on competition…” and Case C-364/92 SAT Fluggesellschaft mbH v Eurocontrol [1994] ECR
I-43, para. 30: “Taken as a whole, Eurocontrol’s activities, by their nature, their aim and the
rules to which they are subject, are connected with the exercise of powers relating to the control
and supervision of air space which are typically those of a public authority. They are not of an
economic nature justifying the application of the Treaty rules of competition”.
18
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991]
ECR I-5889, para. 9: “…[A] dock-work undertaking enjoying the exclusive right to organise
dock work for third parties, as well as a dock-work company having the exclusive right to per-
form dock work must be regarded as undertakings to which exclusive rights have been granted
by the State …”.
19
See Case 311/84 CBEM [1985] ECR 3261, para. 17 and Case C-41/90 Klaus Höfner and
Fritz Elser v Macrotron GmbH [1991] ECR I-1979, para. 24.
20
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991]
ECR I-5889.
 public interest vs freedom of competition in sea ports 159

III. Monopoly against Liberalisation

1. Prerequisite for the Acceptance of a Monopoly in Community Law

Once it is accepted that the service may in principle be provided in a state of
monopoly, the assessment of the legitimacy of the monopoly will occur on the
basis of two general prerequisites, which largely apply also in cargo handling:
the prohibition of discrimination and the abuse of a dominant position. These
two prerequisites are tested on the basis of the fundamental Community prin-
ciple of proportionality, especially in the form of an inquiry into whether
there are less restrictive measures which could equally serve the pubic interest
purpose which prompted the initiation of the measure. In this context, the
ECJ has ruled that it is against the principle of proportionality to oblige deal-
ers to have recourse to expensive cargo handling enterprises enjoying exclusive
rights, when the same service could have been carried out less expensively by
the boat crew, which eventually results in an increase in import costs which is
substantially passed on to the product users.21

A. Non-Discrimination
According to Article 12 of the Treaty any discrimination on grounds of nation-
ality is prohibited, without prejudice to any special provisions contained in the
Treaty.22 Such special provisions are set out in Article 31(1), according to which
Member States shall adjust any state monopolies of a commercial character so
as to ensure that no discrimination exists between European citizens regarding
the conditions under which goods are procured and marketed. Another such
special provision is Article 39(2) of the Treaty according to which freedom of
movement shall entail the abolition of any discrimination based on nationality
between workers of the Member States as regards employment, remuneration
and other conditions of work and employment.23 This safety net of primary

21
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991]
ECR I-5889.
22
Case 305/87 Commission v. Greece [1989] ECR 1461, paras. 12 Kα1 13 and Case C-10/90
Masgio [1991] ECR I-1119, para. 12.
23
As ruled in Case 66/85 Deborah Lawrie-Blum v. Land Baden-Württemberg [1986] ECR
2121, paras. 16–17: “… [T]he term “worker” in Article 48 may not be interpreted differently
according to the law of each Member State but has a community meaning. Since it defines the
scope of this fundamental freedom, the community concept of a “worker” must be interpreted
broadly… That concept must be defined in accordance with objective criteria which distin-
guish the employment relationship by reference to the rights and duties of the persons con-
cerned. The essential feature of an employment relationship, however, is that for a certain
period of time a person perform services for and under the direction of another person in return
for which he receives remuneration”.
160 george gerapetritis

law, as applied in the case of sea cargo handling, constitutes a limit on any
monopoly activity initiated by a Member State in the field.

B. Abuse of Dominant Position

A monopoly undertaking may be deemed to be in a dominant position within
the meaning of Article 82 of the Treaty.24 However, the mere fact of the estab-
lishment of a dominant position by means of granting exclusive rights under
Article 86(1) is not per se incompatible with Article 82, which stipulates that
any abuse by one or more undertakings of a dominant position within the
common market or in a substantial part of it shall be prohibited as incompat-
ible with the common market in so far as it may affect trade between Member
States. Not all forms of exclusive rights violate Community law; a Member
State is in conflict with the above provision only to the extent that the exercise
of exclusive rights by an undertaking leads to an abuse of this dominant posi-
tion,25 or if the granting of these rights is objectively capable of creating a situ-
ation which may reasonably lead to such abusive conduct.26 According to
Article 82, such abusive conduct takes place in particular when one directly or
indirectly imposes unfair purchase or selling prices or other unfair trading
conditions, limits production, markets or technical development to the preju-
dice of consumers, and applies dissimilar conditions to equivalent transactions
with other trading parties, thereby placing them at a competitive disadvan-
tage, or makes the conclusion of contracts subject to acceptance by the other
parties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts.27
In the case of cargo handling, there are two crucial elements: the delineation
of the relevant market and the importance of each port in relation to trade
between Member States. The relevant market normally comprises the organisa-
tion on behalf of third parties of regular cargo functions and the implementa-
tion of these services. This delineation is significant, given that it basically

24
See Case C-41/90 Klaus Höfner and Fritz Elser v Macrotron GmbH [1991] ECR I-1979,
para. 24 and C-260/89 Elliniki Radiophonia Tiléorassi AE and Panellinia Omospondia Syllogon
Prossopikou v Dimotiki Etairia Pliroforissis and Sotirios Kouvelas and Nicolaos Avdellas and others
[1991] ECR I-2925, para. 31.
25
Case C-41/90 Klaus Höfner and Fritz Elser v Macrotron GmbH [1991] ECR I-1979 and
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991]
ECR I-5889.
26
C-260/89 Elliniki Radiophonia Tiléorassi AE and Panellinia Omospondia Syllogon
Prossopikou v Dimotiki Etairia Pliroforissis and Sotirios Kouvelas and Nicolaos Avdellas and others
[1991] ECR I-2925 and Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica
Gabrielli SpA [1991] ECR I-5889.
27
Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli SpA [1991]
ECR I-5889.
 public interest vs freedom of competition in sea ports 161

provides a yardstick for the assessment of the influence exercised globally upon
this sector by a particular sea port. In order to measure this influence, i.e. whether
the particular market constitutes an important part of the common market, the
ECJ normally has recourse to the volume of the cargo transferred via the port
and its significance in relation to the total activity of sea imports and exports in
the particular state. A national provision which effectively facilitates the abuse of
a dominant position may also be incompatible with Articles 28 and 29 which
prohibit quantitative restrictions on imports and exports and all measures hav-
ing equivalent effect, since such a regulation may result in a cost increase which
could consequently discourage imports for other Member States.28

2. Liberalisation Restrictions in Greek Law

In order to identify the domestic law prerequisites for the liberalisation of a
public interest market, one should first identify the purpose for which this
financial transformation is taking place because it is exactly against this pur-
pose that the legality, mostly the suitability and necessity, of the liberalisation
scheme will be assessed. Thus, its basic purpose is managerial, namely better
management of public resources, infrastructures and networks, and provisory,
namely the improvement of services provided to users.

A. Transparency and Meritocracy in the Liberalisation Process

Transparency and meritocracy in the process of cargo handling concession do not
immediately relate to the managerial and provisory purposes of the scheme.
However, they constitute, strictly speaking, a condition for any state activity and
a constitutional prescription in conceding public goods when at the same time
they are demands stemming from specific substantive and procedural rules of
Community law. A particular aspect of these guarantees is adherence to a proce-
dure which secures maximum compensation for the state as a result of the conces-
sion. Even if the assessment of what constitutes a most favourable price to be paid
for the concession is a rather technical judgement for which the judge is not well-
equipped within the boundaries of traditional judicial review, the reasonableness
of the process from the point of view of profit for the state can me measured.

B. Establishment of an Anti-Trust Environment

The purpose for which private involvement is justified in an area traditionally
reserved for the state is in the long run the pursuit of optimum quality services.

28
Case 13/77, SA G.B.-INNO-B.M. v Association des détaillants en tabac (ATAB) [1977]
ECR 2115 and Case C-179/90 Merci convenzionali porto di Genova SpA v Siderurgica Gabrielli
SpA [1991] ECR I-5889.
162 george gerapetritis

For the advancement of this purpose, in the light of the absolute prevalence of
the free market model of economy, the procedure through which the conces-
sion is made ought immediately to guarantee the best possible environment of
healthy and, to the greatest extent possible, free competition. This does not of
course imply that the state is deprived of its right to regulate the national
economy or other aspects of the core of the state. However, the involvement
of private entities in the management of specific services does not mean that
the state is essentially substituted by a private actor in retaining a monopoly.
Nor can the strengthening of the income of individual be a legitimate ground
for a privatisation scheme (since this is fundamentally unacceptable in all cir-
cumstances where public interest is involved), or the inability of the state
rationally and profitably to manage publicly owned services may lead per se to
its withdrawal from the administration of a public interest good.
Accordingly, restrictions on financial freedom can be justified only if they
serve the legitimate purpose of the advancement of better market competi-
tion. It is, therefore, reasonable that the cargo handling privatisation scheme
for the port of Piraeus stipulates that one of the docks will remain under the
administration of the publicly run organisation in order to secure both safety
at the ports as well as some level of competition; such scheme cannot exist at
the port of Thessaloniki, where the only existing dock will be awarded to the
bidder, who will thus retain a de facto monopoly within the port.
A particular, albeit very significant, parameter of privatisations is the dura-
tion of the concession. In the main, in order to make the concession more
attractive to the market actors involved, secure entrepreneurial strategy and
pay off of the investment, the concession is granted for a relatively long time.
However, the duration of the concession cannot be assessed in the abstract,
but must take into account the specificities of each scheme, such as, for exam-
ple, the concession of legal or de facto monopolies, the extent of participation
and/or supervision of the state in the management of the service and the price
to be paid for the concession. At any rate, the concession must be granted for
as long as free competition is not put at great peril. Given the peculiarities of
the privatization scheme in Greece, the 30 year ‘lease’ of the cargo handling
services – in a rapidly evolving market – could be deemed as rather excessive.

C. Legal Supervision of the State

Legal supervision of the operator of the service awarded is a condition stem-
ming not only from law but also from reason.29 The distinction between the
controller and the controlled is a sine qua non for the functioning of a domain

29
See CS 1512/2002, CS (Review Opinion) 158/1992 and Kα2 CS (Review Opinion)
385/1995.
 public interest vs freedom of competition in sea ports 163

where private economy interacts with public interest purposes. It is, therefore,
obvious that the concession of cargo handling services cannot go as far as
complete withdrawal by the state from its primary role as supervisor and regu-
lator of the market.30 A fortiori, it is not possible to award supervisory func-
tions to the operator of the service, or even award substantial participation
rights within the controlling mechanisms, in which case an impermissible
merging of controller and operator occurs; a service can be conceded by a
state, its control cannot. Even though such merging seems to be the case to
some extent in public ports of southern Europe, where this overlap occurs as
a matter of contractual commitment, it is clearly the case that in principle the
supervision of a privatised function must be substantive and distinctive.31
State supervision must retain, at a minimum, the guarantee of the public
order and safety of the ports, and the organisation of relevant measures and
checks of the operation system. The reservation for the state of certain activi-
ties attached to the core of state sovereignty is also closely related to the issue
of supervision. These activities do not relate to the implementation of a service
but mostly to the award of state competence, such as the exercise of physical
searches, licensing and the revocation of licences, suitability certification issue
and the imposition of obligations and penalties.

D. Legal Guarantee of the State

The legal guarantee of the state to end users of the service mostly concerns the
continuity and globality of the service.32 This condition relates to the social
policy of the state to the extent that the service may exercise influence upon the
quality of life of citizens, such as in the case of networks and transportation.33
These conditions become all the more important in the sense that the con-
tinuity and globality of the service may be in conflict with the demand to
draw profit from the market exploitation of he service. It is, therefore, at the
cutting edge between market-oriented profit (which by definition a private
operator is seeking) and the cost-benefit rationale (to which the state normally

30
See CS (Review Opinion) 33/1998.
31
See CS 3946/2002 and CS 159/92 according to which public undertakings offering
goods of vital importance irrespective of their legal status are always subject to state supervision,
from which they cannot get away.
32
As a legal obligation, see CS (Review Opinion) 158/1992, and CS (Review Opinion)
385/1995.
33
According to CS (Review Opinion) 355/2006, the activities of receiving, transferring,
distributing, and storing gas are deemed to be of vital importance for society because they relate
to the provision of a good which is necessary for humans to live decently and the free develop-
ment of their personality and are, therefore, subject to the principle of continuity of public
service.
164 george gerapetritis

adheres when assessing not only the immediate profit and cost of the opera-
tion of an activity but also the social side-effects). A major guarantee of the
continuity and globality of the service is a contractual clause embedded into
the concession contract that the state shall provide the service in the case
of the physical or legal inability of the operator to carry it on. Such clause on
the part of the Minister of Economy and Finance and the Minister of
Commercial Maritime existed at the call and will presumably become part of
the concession contract for the cargo handling lease for Piraeus and
Thessaloniki. A lesser guarantee would be a clause to the effect that the dis-
solution of the private company operating the service should be subject to
approval by a state act.34

E. Obligation to Respect Human Rights

The concession of a service to a private company cannot by any means imply
that there is a diminution in the level of protection guaranteed for the citizens,
given that the exercise of a market activity can obviously have an adverse influ-
ence upon them. Otherwise, the state could easily bypass its fundamental
obligation to respect human rights by using the legal vehicle of privatisations.
In that way, there is a transfer of the obligation to respect citizens’ rights to the
individuals who are structurally exercising public functions. In this case there
is not strictly speaking an overall third-party effect of the constitutional pre-
scription to respect human rights, but direct subjection of the operator to a
fully-fledged obligation tantamount to that of the state.
Some of the classical human rights may be of relevance in the case of sea
ports: the protection of human dignity, health, life and personality, of per-
sonal data, of the environment and the guarantee of access to documentation.
However, the most closely related guarantee, due to its financial-oriented
nature, is the operator’s obligation to provide services to everyone under equal
and tolerable conditions. This restriction does not of course imply that the
operator is deprived of its managerial discretion to set out its business plan
according to the principles of private economy. What the restriction entails is
that the commercial activity cannot operate as a means to distort the market.
Practices having the effect of creating market conditions in favour or against
certain market actors or end users or essentially curtailing their rights freely to
participate in market functioning by establishing differentiated or overbur-
dened conditions of access cannot be tolerated.35

34
Requirement set out by CS (Review Opinion) 355/2006.
35
The French Constitutional Council in Decision 543/30.11.2006 ruled that restrictions
on business activities are justified on grounds relating to gas network cohesion and the mainte-
nance of equal end user prices.
 public interest vs freedom of competition in sea ports 165

The most controversial application of human rights in the case of privatisa-

tions is that of labour rights. Under Greek law, it seems that there is no general
constitutional obligation to maintain the level of working conditions when con-
veying a service from the public to the private sector, even though it is usually the
case that, due to the political impact of such schemes, the Government normally
introduces legislation to secure the jobs of civil servants.36 In fact, there is very
weak constitutional support for the argument that established working rights
cannot be affected on the ground that this would entail the bypassing of the
constitutional prescription that civil servants holding posts provided by law
are permanent so long as these posts exist,37 or that work constitutes a right and
the state must seek to create conditions of employment for all citizens,38 or even
the principle of respect for the legitimate expectations of citizens. The only vehi-
cle which could reasonably be asserted in that respect is Article 1 of the First
Additional Protocol to the European Convention on Human Rights which guar-
antees the protection of property, as interpreted by the Court of Strasbourg.39

IV. Concluding Remarks

First remark: given that there is very often a clash between domestic and
Community law when dealing with privatization schemes, it is imperative to have
a joint interpretation of the two sets of legislation. This harmonised interpretation
has become much easier in the last few decades in the sense that there is a clear
tendency towards convergence of the economic models of the free market and
state interventionism. Indeed, the states, which have been reluctant to abolish
sovereign rights, seem to be on a one way road toward less state interventionism,
whereas the Community model, fundamentally construed to preserve free econ-
omy, has made serious concessions in favour of a more socially involved model of
economy, through legislative instruments protecting the environment, labour,
social equality and, generally speaking, the policy of social cohesion in Europe.40

36
For the SAs running the ports of Piraeus and Thessaloniki (OLP SA and OLTh SA respec-
tively) see Articles 4–7 of the concession contract by the state (Law 3654/2008).
37
Article 103 para. 4 of the Constitution.
38
Article 22 para. 1 of the Constitution.
39
See in particular ECHR decision of 16th September1996, Gaygusuz V. Austria [1997] 23
EHRR 364, where the Court used the Protocol as one of the legal grounds for condemning
Austria for not having awarded a social security allowance to a foreigner. For the influence
exercised in that respect in the European Union see Alberton Ch., Le droit de propriété dans la
jurisprudence communautaire in Sudre F. & Labayale H. (éds.), Réalités et perspectives du droit
communautaire des droits fondamentaux, Bryllant, Bruxelles 2000, p. 295 and Case C-138/02,
Brian Francis Collins Kατ5; Secretary of State for Work and Pensions, [2004] ECR I-2703.
40
See the major contribution of the Single European Act, which added to the EC Treaty
labour (Article 118 A) and social cohesion (Article 130 A) provisions, as well as the extensive
166 george gerapetritis

Second remark: in the final analysis it is not of primary practical signifi-

cance to promote a model of private or state-run services of public interest.
What are clearly important are the conditions under which the service is pro-
vided (the costs involved and the quality of service) and the supervision of the
state, which needs to be effective to guarantee that the operator will abide by
the concession terms, that the human rights involved are not impaired and
that the service will continue to be provided unreservedly.
Third remark: the core of the state tends to be shrunken. Services and net-
works, such as telecommunications, waters, energy, transportation, attached
to the basic notion of the state as public resources have been or are in the proc-
ess of being liberalised. Even in countries where the state has traditionally
been gigantic, like Greece, liberalisation of the relevant markets has occurred
without major upsets for the economy and the people, although expectations
have not always been met. In fact one might argue that there is no service
which a priori and eternally belongs to the state. Even those functions which
have historically been a monopoly of the dominance of the state and are con-
sidered its integral parts, such as the army and the police, have not always
been like this. As early as in the 16th century, the army which conquered
Mexico on behalf of the Spanish crown was a private army run by Hernán
Cortés, who received compensation from the conquered new territories for
operating this state service. The rule must, therefore, be: no market in principle
closed, no market unbound in its freedom. The optimum line between the two
lies jointly within the domestic and the community legislator.

relevant secondary legislation, e.g. Regulation 883/2004 (EE L 166, 30.04.2004, p. 1),
Regulation 631/2004 (EE L 100, 06.04.2004, p. 1), Regulation 859/2003 (EE L 124, 20.05,
p. 1), Directive 2004/38 (EE L 158, 30.04.2004, p. 77) and Directive 2002/73 (EE L 269,
05.10.2002, p. 15). The Treaty of Maastricht, the Protocol 14 on Social Policy, the Amsterdam
Treaty and the Lisbon Strategy, as enhanced at the 2000 Council, further deepened the
Community social manisfesto. For an overall assessment of the intrusion of social rights into
community law see, De Schutter O., L’ Union européene et les droits sociaux, in Candela Soriano
M. (dir.), Les droits de l’ home dans les politiques de l’ Union européene, Larcier, Bruxelles
2006, p. 107 and Sakellaropoulos Th. & Berghman J. (eds.), Connecting welfare diversity within
the European social model, Intersentia, Antwepen-Oxford-New York 2004, p. 189.
 THE APPLICATION OF THE EC COMMON RULES
ON COMPETITION TO CABOTAGE, INCLUDING
ISLAND CABOTAGE

Rosa Greaves*

I. Introduction
II. The Maritime Transport Services Market
1. The Cabotage Regulation and Relevant ECJ Case Law
A. Manning
B. Safeguard Measures
C. Public Service Obligations/Contracts and Island Cabotage
2. The Impact of the Cabotage Regulation on National Markets
III. The EC Common Rules on Competition and the Maritime Transport Services
Market
1. The EC Competition Rules
A. The Modernisation of EC Competition Law Regime
B. Application of EC Competition Rules to Cabotage Services
2. The State Aids Rules
3. Island Cabotage and Public Service Obligations/Contracts
IV. Concluding Observations

I. Introduction

The EC common rules on competition are set out in Chapter 1 of Title VI of

the EC Treaty. They comprise two sets of rules: rules applying to undertak-
ings, Articles 81 to 86, often referred to as the ‘EC competition rules,’ and
rules on aids granted by States, Articles 87 to 89, better known as the ‘State
aid rules’.
The EC competition rules apply to all economic sectors including trans-
port1 but the procedural regulation adopted to implement those rules, Council
Regulation 17,2 was not applicable to the transport industry. It was only in
1986, with the adoption of Council Regulation 4056/863 which laid down
detailed rules for the application of Articles 81 and 82 EC Treaty to maritime

* Professor of Law, Universities of Glasgow and Oslo.

1
Case 156/77 Commission v Belgium [1978] ECR 1881.
2
Regulation 141, OJ Sp. Ed. 1959–62 p. 291, excluded the transport industry from the
scope of Regulation 17, OJ Sp. Ed. 1959–62 p. 57, the first general procedural regulation
adopted to implement the EC competition rules.
3
OJ 1986 L378/4.
168 rosa greaves

transport, that procedural rules were established to implement the EC

competition rules to this mode of transport.4
Maritime transport services provided within a Member State (cabotage)
have always been a sensitive area for the application of EC competition rules.
Until the end of the twentieth century the national laws of a significant
number of EU Member States restricted access to this market to ships regis-
tered under their own flag, and, often, to State-owned operators. However,
since January 1999 when the maritime cabotage services market became fully
liberalised,5 there was no compelling reason why the EC competition rules
should not fully apply to this market. Nevertheless, as far as island cabotage is
concerned, the nature of the market has not changed much, in the sense that
the imposition of public service obligations or the award of public service
contracts is often necessary in order to maintain a regular and efficient provi-
sion of maritime services for passengers and goods throughout the year. Where
such contracts exist, the Member States concerned may have to ensure that
the process of awarding the contracts satisfies the EC public procurement
rules. Furthermore, where the Member States compensate the operators for
the public service obligations imposed, there may be issues of compatibility of
the compensation with the EC State aid rules.6
The chapter will first set the scene by placing cabotage services within the
context of the development of the EC Maritime Transport Policy from 1986
to 1992. It will also briefly consider Council Regulation 3577/92 (the
Cabotage Regulation)7 and the relevant European Court of Justice (ECJ) case
law.
Secondly, the chapter will focus on the EC competition rules (Articles 81
and 82 EC Treaty), and consider the likely impact of these rules on cabotage
services generally, given that these rules now apply to this type of maritime
transport service.
Thirdly, the chapter will consider island cabotage with particular focus on
the tension between ensuring that a degree of competition exists in this mar-
ket and acknowledging the public service function of these maritime trans-
port services. The chapter will not consider the EC public procurement rules

4
The Regulation has been repealed by Council Regulation 1419/2006, OJ 2006 L269/1.
However the provisions concerning the block exemption of liner shipping conferences contin-
ued to apply until 18 October 2008. This significant change took place after the publication of
the White Paper on the review of Regulation 4056/86, COM(2004)675.
5
Greece was given an extension for island cabotage until 1 January 2004 for regular pas-
senger and ferry services and services provided by vessels of less than 650 grt (Article 6(3) of
Council Regulation 3577/92, OJ 1992 L364/7).
6
Articles 87 to 89 EC Treaty.
7
OJ 1992 L364/7.
 application of the ec common rules on competition to cabotage 169

in respect of the award of public service contracts, but it will consider generally
the application of the EC State aid rules to the grant of compensation when
public service obligations are imposed.

II. The Maritime Transport Services Market

The transport industry, due to its distinct features,8 was not made subject to
every general rule set out in the EC Treaty.9 The compromise that was reached
in 1957 was to provide the means for the Member States to work towards a
common transport policy10 governed by Title V (Articles 70 to 80) EC Treaty.
In particular, Article 80(2) states that the EU Council ‘may … decide whether,
to what extent and by what procedure appropriate provisions may be laid
down for sea and air transport.’ Prior to 1987 there was no Community provi-
sion on the freedom to provide maritime services.11 The first significant liber-
alisation measure was adopted in 1986 with the enactment of the so-called
‘first maritime package of legislative measures’, which included Council
Regulation 4055/86 applying the principle of freedom to provide services to
maritime transport between Member States and between Member States and
third countries.12 This Regulation, however, excluded coastal shipping within
one Member State (cabotage) from its scope.13 It was not until the adoption
of Council Regulation 3577/92, applying the principle of freedom to provide
services to maritime cabotage,14 that the legislative regime to open up the
maritime transport services market to competition was completed.15

1. The Cabotage Regulation and Relevant ECJ Case Law

The liberalisation of maritime cabotage services was first proposed by the
Commission as part of the first maritime package in 1986. Having failed to
persuade all the Member States to include cabotage services in the liberalisation

8
See Greaves R., EC Transport Law, Pearson, 2000, ch.1.
9
Article 51(1) EC Treaty expressly states that the ‘[f ]reedom to provide services in the field
of transport shall be governed by the provisions of the Title relating to transport’.
10
Article 3(f ) EC Treaty states expressly that one of the Community’s activities is the adop-
tion of ‘a common policy in the sphere of transport’.
11
Confirmed in Case C-49/89 Corsica Ferries France v Direction Generale des Douanes
Francaises (Corsica ferries France Case) [1989] ECR I-4441, paras 13 and 14.
12
OJ 1986 L378/1.
13
Member States such as France, Greece, Italy, Portugal and Spain restricted mainland cargo
cabotage and inland passenger services to ships carrying their national flag.
14
See above, note 7.
15
The Cabotage Regulation, however, introduced freedom to this market gradually. All
maritime cabotage services were liberalised by January 1999, except for the Greek island
170 rosa greaves

of maritime services, the Commission proposed a specific regulation in its

1989 second package of maritime measures. Due to lack of agreement and the
need to negotiate various compromises, the adoption of the Cabotage
Regulation was delayed until 1992.
The scope of the Regulation is set out in Articles 1 and 2. The Regulation
provides in Article 1(1) that Community shipowners16 who have their ships
registered in a Member State and comply with all the conditions for carrying
out cabotage in the home Member State, may offer cabotage in another Mem-
ber State (the host Member State). According to Article 2(1) the Regulation
covers mainland cabotage, off-shore supply services and island cabotage.
Article 2(1) has been interpreted by the ECJ in an infringement action brought
by the European Commission against Greece.17 The ECJ was asked to deter-
mine whether towage services on the open sea came within the scope of the
Cabotage Regulation. The Court ruled that towage services cannot be regarded
as falling within the scope of Article 2(1).18 Thus, the ECJ adopted a narrow
interpretation of the scope of the Regulation. The Court was not prepared to
extend the scope of Article 2(1) so as to cover any service incidental or ancil-
lary to the provision of maritime transport services within the Member States.
The essential characteristic of maritime cabotage is to serve the purpose of
transporting passengers or goods by sea19 between two places in the territory
of a single Member State.
The sensitivity of the Cabotage Regulation is further evidenced by various
time derogations expressly allowed by the Regulation,20 the specific provisions

cabotage market which was granted a 1 January 2004 deadline. Thus, as confirmed by the ECJ
in Case C-285/05 Enosi Efopliston Aktopolias v Ypourgeio Emporikis Naftilias [2006] ECR I-97,
no rights were conferred on individuals by Article 6(3) of the Cabotage Regulation prior to
January 2004 even where Greece had adopted national legislation implementing the
Regulation.
16
Article 2(2) defines ‘Community shipowners’ in the same manner as Council Regulation
4055/86, OJ 1986 L378/1, namely Community nationals established in a Member State or
established outside the Community but which provide such services to others in a Member
State. It also applies to shipping undertakings which are established outside the Community
but are ‘controlled by nationals of a Member State’ on condition that the ship is registered ‘in
that Member State in accordance with its legislation’. In addition, the Regulation provides
expressly for the extension of its scope to nationals of third countries established in the
Community if the EU Council so decides (Article 7 of Regulation 4055/86). To date the
Council has taken no such action.
17
Case C-251/04 Commission v Greece [2007] ECR I-67 (Second Chamber).
18
Para. 33 of the judgment. This ruling is contrary to the Commission’s interpretation of the
scope of Regulation 3577/92 as set out at page 8 of COM(2003)595 final.
19
The Court cited, with approval, the Greek Government’s reliance on Article 1(4) of
Regulation 4055/86 (OJ 1986 L378/1) which states that services are to be considered maritime
transport services ‘where they are … for the purpose of transporting passengers or goods by
sea ….’
20
Article 6.
 application of the ec common rules on competition to cabotage 171

on manning,21 safeguards22 and public service obligations,23 as well as the duty

imposed on the European Commission to report on the implementation of
the Regulation every two years.24
A. Manning
Some Member States were reluctant to allow the laws of the home (flag) State
(the State where the ship is registered) to apply to the manning of the ship.
Thus the provisions on manning set out in the Cabotage Regulation are the
result of a compromise. The Regulation provides that the home State’s laws
apply to the manning of ships which carry out mainland cabotage and are
over 650 grt.25 However, host State laws on manning apply to ships under 650
grt carrying out mainland cabotage and to all ships operating island cabotage
irrespective of size,26 unless the latter are cargo ships over 650 grt and engaged
in consecutive island cabotage.27 The Commission, however, was requested to
propose a legislative measure28 for the EU Council to adopt providing for
uniform manning rules for seafarers. Some Member States were unhappy with
the proposed measure, which provided that seafarers from non-member coun-
tries working on board ships carrying out regular passenger and ferry services
should enjoy identical employment conditions to those of the residents of the
Member States. The proposal was eventually withdrawn in 2001.
The Cabotage Regulation does not specify which manning rules are the
responsibility of the host State. In its 2003 Communication29 on the interpre-
tation of Regulation 3577/92, the Commission expressed the view that the
host State’s competence is not unlimited, since it derogates from the funda-
mental EC Treaty principle of the freedom to provide services. The Commission
considers that the host State may specify the crew’s nationality, require the sea-
farers to have EU social insurance cover and impose national minimum wage
rules. However, as far as matters relating to safety rules and training (including
languages spoken on board) are concerned, the most the host State may demand
is compliance with Community or international rules in force such as the
Conventions on Standards of Training, Certification and Watchkeeping for
Seafarers (STCW) and on the Safety of Life at Sea (SOLAS).30

21
Article 3.
22
Article 5.
23
Article 4.
24
Article 10.
25
Article 3(1).
26
Article 3(2).
27
These are ships which, although operating an island cabotage service, the cabotage leg of
the journey follows or precedes a voyage to and from another Member State (Article 3(3) ).
28
COM(98)251 final.
29
COM(2003)595 final.
30
Ibid., point 4.1.
172 rosa greaves

The ECJ has not had an opportunity to rule on the scope of the host State’s
competence on manning but it has been asked to interpret Article 3(3) of the
Regulation in Agip Petroli.31 This provision states ‘… for cargo vessels over 650
grt carrying out island cabotage, when the voyage concerned follows or pre-
cedes a voyage to or from another State, all matters relating to manning shall
be the responsibility of the State in which the vessel is registered (flag state)’.
The Italian authorities refused permission for a Greek registered tanker to take
a cargo of crude oil from one port to another, both in Sicily, on the ground
that the ship’s crew were not Community nationals. Although the tanker’s
cabotage voyage was going to be followed by a voyage directly to another
State, this was a voyage without a cargo on board (ie voyage in ballast).
According to the Italian authorities Article 3(3) of the Cabotage Regulation
applies only where the non-cabotage journey was functionally and commer-
cially autonomous, that is, with cargo on board. The ECJ, relying on the lib-
eralisation objective of the Regulation and the fact that it was not uncommon
for voyages in ballast to take place,32 ruled that Article 3(3) covers situations
where the ship sails to another State in ballast.33 The Court, however, acknowl-
edge that where there was evidence that operators had artificially set up an
international voyage in order to circumvent the application of the host state’s
manning rules, they would not be able to rely on Article 3(3).34
Thus, although only one interpretative ruling has been delivered on the
manning provisions, the Court’s ruling in Agip Petroli safeguards the principle
of freedom to provide services and imposes on the host State the evidentiary
burden of demonstrating that the voyage to the other Member State is not
bona fide.

B. Safeguard Measures
As stated above, safeguard measures are permitted under the Cabotage
Regulation35 in the case of serious disturbance of the internal transport market
due to the liberalisation of cabotage services. Normally, safeguard measures
can be granted by the Commission only at the request of a Member State.
However, in cases of emergency the Regulation permits unilateral provisional
measures to be adopted by the Member State concerned, but they may remain

31
Case C-456/04 Agip Petroli SpA v Capitaneria di porto di Siracusa et seq [2006] ECR
I-3395 (second Chamber).
32
Paras 13 and 17 of the judgment.
33
Para. 15 of the judgment. This conclusion is different from the one expressed by the
Commission in its Interpretative Communication (COM (2003)595 final) at point 4.2.
34
Para. 25 of the judgment.
35
Article 5.
 application of the ec common rules on competition to cabotage 173

in force for only three months and must be notified to the Commission
immediately. Where the Commission takes action, the safeguard measure may
take the form of a temporary (not to exceed twelve months) exclusion of the
area concerned from the scope of the Regulation. The only safeguard measure
adopted to date was in 1993 when Spain acted unilaterally by suspending the
application of the Cabotage Regulation for three months. In conformity with
its obligation under the Regulation, Spain notified the Commission. Although
the Commission abrogated the Spanish measure36 as it did not consider the
situation to be an emergency, it did permit Spain to suspend the application
of the Regulation for certain cabotage services37 for two consecutive periods of
six months.38

C. Public Service Obligations/Contracts and Island Cabotage

Member States with island territories have always been concerned that the
opening up of the cabotage services market may endanger the provision of
regular passenger and goods services to, from and between islands.39 These
maritime links are important for the island communities in order for them to
sustain their economies. Thus State intervention may be required when the
routes are not adequately served by the market. The Cabotage Regulation
expressly permits the imposition of public service obligations40 and the con-
clusion of public service contracts on a ‘non-discriminatory basis in respect of
all Community shipowners’.41 In imposing public service obligations States
may require prior authorisation or operate a licensing system.
The ECJ’s ruling in Analir 42 confirmed that prior administrative authorisa-
tion43 and the award of public service contracts are compatible with the

36
Decision 93/125, OJ 1993 L49/88.
37
The transport of break-bulk general cargo, transport of dry bulk cargo and transport of
chemical products in specialised tankers.
38
Decision 93/396, OJ 1993 L127/33.
39
According to the Commission’s Interpretative Communication, COM(2003)595 final,
point 5.1, long estuaries or fjords which lead to a detour of about 100 km by road may be
treated as islands for the purposes of public service provisions as they cause a similar problem
of isolation.
40
These are obligations imposed on the service provider to ensure standards of continuity,
regularity, capacity and pricing which a purely commercial operator might not otherwise
assume.
41
Article 4 of the Cabotage Regulation.
42
Case C-205/99 Asociation Professional de Empresas Navieras de Lineas Regulares (Analir)
and others v Administracion General del Estado [2001] ECR I-1271 (Full Court). A Spanish
shipowner association (Analir) sought annulment of a Spanish law as inconsistent with the
Cabotage Regulation. The Tribunal Supremo of Spain sought a ruling on several questions
relating to the interpretation of Article 4 of the Regulation.
43
It should be noted that the Commission in the Interpretative Communication,
COM(2003)595 final, expressed the view that it would be difficult for a Member State to
174 rosa greaves

Cabotage Regulation as long as three conditions are met. First, the Member
State has to provide evidence that there is a real need for State intervention
arising from the inadequacy of the regular transport services under conditions
of free competition. Secondly, the Member State must demonstrate that the
prior administrative authorisation is necessary and proportionate to the aim
pursued. Finally, the Member State has to show that the devised scheme is
based on objective and non-discriminatory criteria which are transparent to
the undertakings concerned. The Court also ruled that a prior administrative
authorisation scheme is not incompatible with the Cabotage Regulation by
being subject to conditions other than those set out in Article 4(2) of the
Regulation. Thus the Spanish requirement that those operating these services
should have no outstanding tax or social security debts was permitted. The
Court held that the solvency of a Community shipowner is an important and
relevant factor to be taken into account in establishing whether the undertak-
ing concerned has the ‘capacity to provide the service’ within the meaning of
Article 4(2).
The ECJ also ruled that public service obligations and public service
contracts may co-exist concurrently or as alternatives on the same route in
order to ensure regular traffic to, from or between islands as long as they are
applied on a non-discriminatory basis, justified in relation to the public inter-
est objective pursued and consistent with the principle of proportionality. The
Court stated that the two methods have the same objective but differ in nature
and degree. The Court agreed with Advocate General Mischo44 that situations
could be envisaged where the imposition of public service obligations might
not be sufficient to achieve the objectives. A public service contract sets out
the transport services to be performed for consideration, which normally is
financial. It gives the Member State contractual guarantees. Public service
obligations, on the other hand, are imposed in the absence of a contract. The
provider determines which services it will offer subject only to the obligations
imposed by the Member State. Sometimes financial compensation may be
available, but the provider has greater control over the services it provides.
In concluding public service contracts or imposing public service obliga-
tions, Member States also have to comply with the Community’s directives in
respect of public procurement contracts45 and the EC Treaty’s provisions on

introduce an authorisation system after the entry into force of the Regulation without infring-
ing the standstill provision set out in Article 7 of the Cabotage Regulation.
44
Paras 109–111 of the Opinion.
45
In its Interpretative Communication, the Commission expressed the view that abiding by
the public procurement rules would entail ‘at the minimum, a sufficient degree of publicity, in
order to ensure an effective competition, as well as the organization of a transparent
and non-discriminatory selection procedure proportionate to the aim to be achieved’ (p. 15,
point 5.4).
 application of the ec common rules on competition to cabotage 175

State aids rules (Articles 87 to 89 EC Treaty). As already stated above, a

detailed discussion on the application of the public procurement rules to
public service contracts is outside the scope of this chapter but the application
of the State aid rules will be discussed below in section III.2.

2. The Impact of the Cabotage Regulation on National Markets

The Commission’s 4th Report on the implementation of this Regulation,
published in 2002,46 concluded that penetration by foreign ships into the
national cabotage services market remains limited in the majority of the
Member States. A 5th Report to be published in 2008 or 2009 is expected to
conclude that maritime cabotage is surviving where there is no competition
from other modes of transport.47 It is also evident that the cabotage market
penetration of ships flying non-Member States’ flags is very reduced. However,
the nature of the market is changing, with more ships providing combined
cabotage and international maritime transport services. As far as island cabo-
tage is concerned, this is mostly served by public service lines of mixed cargo
and passenger type.
The impact of opening up the cabotage services market varies. Some
Member States have not been affected at all,48 some have completed the liber-
alisation of maritime cabotage by the deadline,49 whilst others,50 which were
permitted to implement the Cabotage Regulation gradually, were affected in
different ways. For example, the Cabotage Regulation produced no impact on
the evolution of the maritime cabotage services market for France since, in
practice, France applied the host State rules as established by the Regulation.
Nevertheless, the Commission took infringement action against France for
failing to amend national law within a reasonable period. France failed to
amend a provision of the 1977 Customs Code which provided that French
cabotage services were reserved for ships flying the French flag. France had
taken administrative measures51 to ensure the temporary application of the
Regulation, but the ECJ affirmed52 the Commission’s position that these steps

46
COM(2002)203 final.
47
The description of the cabotage market in this section relies on the unpublished material,
namely the conclusions prepared on the economic developments in maritime cabotage for the
forthcoming 5th Report.
48
Belgium, Ireland, Netherlands, Latvia, Lithuania and Slovenia as well as Cyprus, Estonia,
Malta and Poland where cabotage is practically irrelevant.
49
Denmark, Finland, Germany, Sweden, United Kingdom, Iceland and Norway.
50
France, Greece, Italy, Portugal and Spain.
51
A circular setting out the terms of the Cabotage Regulation and a footnote had been
added to the Customs Code.
52
Case C-160/99 Commission v France [2000] ECR I-6137.
176 rosa greaves

were insufficient to discharge France’s EC Treaty obligation to remove national

law incompatible with Community law.53
Similarly, the introduction of the Cabotage Regulation appears to have had
no significant impact on the Italian cabotage market where both goods and
passengers are transported in cabotage by ships flying the Italian flag. Although
there is some evidence of some ships flying non-Member States’ flags appear-
ing on the cabotage market, they have not remained in the market.
Some Member States such as Greece and Portugal, with significant island
cabotage, have not suffered a detrimental impact due to the existence of
public service contracts (Greece) and public service obligations (Portugal).
Greece awards public service contracts after a call for tenders.54 The contracts
contain provisions for operating the public service routes and thus a consid-
erable cost rise for these services is a direct consequence of the liberalisation
of island cabotage. Portuguese cabotage services are subject to public service
obligations the provisions of which are transparent, non-discriminatory and
open to all operators wishing to offer these services. For both Greece and
Portugal the host State rules for manning permitted by the Cabotage
Regulation for island cabotage are very important in these trades for safety
and social reasons.
The Spanish cabotage market has been mainly concerned with applying
host State rules and thus avoiding ships operating these services with lower
fixed seafarers’ costs, namely ships registered in non-Member States.
Thus, almost ten years from the full liberalisation of maritime cabotage
services, the market is diminishing for cargo traffic between mainland terri-
tory ports and it is only marginal in respect of cargo traffic between small
islands. Furthermore, there is a blurring of the limits between international
maritime services and cabotage services as more ships operate these services
consecutively. As far as passenger cabotage services are concerned, mainland
cabotage is marginal between ports on the mainland territory with the possible

53
The ECJ relied on an established principle of Community law that a breach of an EC
Treaty obligation exists where a Member State retains a national law incompatible with
Community law, even where the Community measure, such as the Cabotage Regulation, is
directly applicable within the national legal orders of the Member States. In June 2007 the
Commission sent Spain a letter of formal notice for failing to abide by the ECJ’s judgment in
Case C-323/03 Commission v Spain [2006] ECR I-2161 (Second Chamber). Spain continued
to maintain in force conditions governing maritime services in the Vigo estuary which were
found to be incompatible with the Cabotage Regulation.
54
At the end of 2005, the Commission sent a reasoned opinion to Greece for failing to
comply with the maritime cabotage rules. One of the alleged infringements concerned the
Greek practice of imposing public service obligations on almost all intra-island shipping serv-
ices. For further analysis of the position in Greece see Mikroulea, A., Competition and Public
Service in Greek Cabotage, infra.
 application of the ec common rules on competition to cabotage 177

exception of the seasonal market for tourists. Passenger services between

islands are subject to public service obligations or public service contracts,
while those from and to mainland-island services retain their importance since
these routes can be serviced only by ferries.55

III. The EC Common Rules on Competition and the Maritime

Transport Services Market

In this section the application of the EC competition rules to maritime

transport will be explained briefly, and this will be followed by an analysis
of their application to maritime cabotage services. Then, EC State aid
rules will be considered in the specific context of the island cabotage services
market.

1. The EC Competition Rules

As stated in the introduction above, Regulation 4056/86 was adopted in order
to lay down detailed rules for the application of the EC competition rules to
the maritime transport services industry. Regulation 4056/86 was a hybrid
instrument, since it provided the procedural rules for the enforcement of the
EC competition rules to maritime transport services and also contained spe-
cific substantive rules in respect of exceptions56and block exemptions57 for
certain categories of maritime agreements which were likely to be anti-
competitive within the meaning of Article 81(1) EC Treaty. As far as Article
82 EC Treaty is concerned, Article 8 of Regulation 4056/86 reiterated that
this Article applies directly without the need for a prior decision.58 For exam-
ple, where the conduct of an exempted liner conference had effects incompat-
ible with Article 82, the Commission had the power to withdraw the benefit
of the automatic exemption, but before taking a decision the Commission

55
These are routes which are used by passengers and private cars and/or commercial distri-
bution vehicles.
56
Article 2 provided exception for certain technical agreements.
57
Block exemption regulations permit agreements which comply with specified conditions
and obligations to be exempted from the prohibition of Article 81(1). Article 6 of the Regulation
granted an exemption for agreements between transport users themselves or between users and
conferences concerning rates, conditions and the quality of liner services. Furthermore, Article
5 of the Regulation contained detailed provisions as to when the liner conference agreements
themselves could be exempted en bloc from the prohibition of Article 81(1). Consortia agree-
ments remain exempted under Regulation 823/2000, OJ 2000 L100/24.
58
Confirmed in Cases T-24 to 26/93 and 28/93 Compagnie Belge Transports SA v Commission
[1996] ECR II-1201.
178 rosa greaves

had authority to make recommendations to the conference which, if adopted,

would terminate the infringement. However, this Regulation applied ‘only to
international maritime services from or to one or more Community ports’59
and thus it did not apply to cabotage.60

A. The Modernisation of EC Competition Law Regime

The European Commission proposed the modernisation of EC competition
law in a White Paper issued in 1999.61 Competition legislation already adopted
in 1999 and 2000 is also considered to be part of the modernisation process.
This legislation consists of the third generation of block exemption regula-
tions dealing with vertical agreements62 and horizontal cooperation agreements,
namely specialisation agreements and research and development agreements.63
Post-1999 modernisation measures64 introduced a more economic approach
to the enforcement of Article 81 EC Treaty. The policy adopted is no longer
one of prescribing the restrictions which can be included in an agreement but
rather to list fewer forbidden restrictions (the so-called hardcore restrictions)
which, if included, will deny the agreement automatic protection under the
block exemption regulation. Whether agreements between undertakings ben-
efit from an automatic exemption from the prohibition of Article 81(1) is
primarily determined by the size of the market share of the undertakings con-
cerned. Larger undertakings will have to carry out a self-assessment applying
both Article 81(1) and 81(3) to determine whether their agreements are law-
ful.65 Thus, innovative ways of doing business may be developed more easily
without fear of losing the protection afforded by these legislative derogations.

59
Article 1(2).
60
The Regulation also did not apply to tramp services.
61
Commission White Paper on the modernisation of rules implementing Articles 81 and 82
of the EC Treaty, OJ 1999 C132/1.
62
Commission Regulation 2790/99, OJ 1999 L336/21 and the accompanying Guidelines,
OJ 2000 C291/1.
63
Commission Regulation 2658/2000, OJ 2001 L304/3, Commission Regulation
2659/2000, OJ 2001 L304/7, and the accompanying Guidelines, OJ 2001 C3/2.
64
These legislative measures comprise the third generation block exemption regulation on
technology transfer agreements (Commission Regulation 772/2004, OJ 2004 L123/1) and the
third generation merger regulation (Council Regulation 139/2004, OJ 2004 L24/1) as well as
the second generation of sector-specific block exemption regulations on vertical agreements in
the motor vehicle sector (Commission Regulation 1400/2002, OJ 2002 L203/30) and on
certain types of insurance agreements (Commission Regulation 358/2003, OJ 2003 L53/8).
65
Guidelines are available to assist undertakings (and/or their advisers) in assessing the com-
patibility of their agreements with Article 81 EC Treaty. For example, Commission Notices on
Agreements of Minor Importance (OJ 2001 C368/13); on the application of Article 81(3) EC
Treaty (OJ 2004 C101/97) and on the meaning of ‘affect trade between Member States’ (OJ
2004 C101/81).
 application of the ec common rules on competition to cabotage 179

Most block exemption regulations are accompanied by detailed guidelines to

assist the undertakings and their advisers on whether the agreement fall within
the scope of the regulation.66 The guidelines also provide useful guidance on
the evaluation of whether agreements falling outside the block exemption
regulation may, nevertheless, benefit from the exception under Article 81(3)
EC Treaty.
However, the most significant change which has taken place post 1999 was
the adoption of Regulation 1/200367 which has had a major impact on how
EC competition law is applied and enforced. Regulation 1/2003 abolished the
notification system as well as the Commission’s exclusivity in granting indi-
vidual exemptions under Article 81(3) EC Treaty. Thus a radical change of
policy on the enforcement of EC competition rules took place. National com-
petition authorities became directly involved in the enforcement of the EC
competition rules, thus providing an effective solution to the inability of the
European Commission to cope with the very large number of notifications. A
European competition authorities’ network (ECN) was established to provide,
inter alia, the mechanism for more experienced national authorities to share
best practices, the forum to deal with the allocation of cases in order to avoid
duplication of work or contradictory decisions, and to assist in maintaining a
coherent and effective system of enforcement.68 Regulation 1/2003 has been
amended by Regulation 1419/200669 to bring maritime transport under the
common competition enforcement regime applicable to all economic indus-
try sectors.

B. Application of EC Competition Rules to Cabotage Services

How will the new competition regime apply to maritime cabotage services?
Any agreements/arrangements between cabotage operators (competitors) or
between cabotage operators and other service providers (non-competitors)
which affect trade between Member States will have to be compatible with
Article 81(1) EC Treaty.70 Agreements restricting competition within the
meaning of Article 81(1) may be lawful provided that they meet the four

66
The most relevant ones for the provision of maritime services are those concerning hori-
zontal cooperation agreements. Above, note 63.
67
OJ 2003 L1/1. This Regulation replaced Regulation 17 (OJ Sp. Ed. 1959–62 p.57), the
first regulation implementing Articles 81 and 82 EC Treaty.
68
Commission Notice on cooperation within the Network of Competition Authorities, OJ
2004 C101/43.
69
OJ 2006 L269/1.
70
For example, an agreement between A, a shipping undertaking offering cabotage services
in Member State A, and B, another undertaking offering similar cabotage services in Member
State B, not to attempt to compete on each other’s territory.
180 rosa greaves

conditions set out in Article 81(3) EC Treaty. Such agreements must increase
efficiency and enable consumers to receive a fair share of the resulting benefits,
as well as not contain any restriction which is not indispensable to the attain-
ment of these objectives and, finally, not eliminate competition arbitrarily.
The Commission has issued draft guidelines on the application of Article 81
EC Treaty to maritime transport71 to assist undertakings and their advisers in
how to apply Article 81 to various maritime arrangements. In the guidelines
the Commission sets out the principles it applies when defining markets and
assessing cooperation agreements in the maritime sector. It also emphasises
that existing guidelines such as those concerning the application of Article 81
EC Treaty to horizontal agreements72 and guidelines concerning the applica-
tion of the exception under Article 81(3) EC Treaty73 are particularly relevant
to maritime arrangements. Although the guidelines do not specifically address
cabotage services, they will be relevant insofar as cabotage services are pro-
vided either as liner or tramp shipping services.74 The burden is now on under-
takings and their advisers to assess correctly the compatibility of their business
arrangements with Articles 81 and 82 EC Treaty. There is no longer the pos-
sibility of notifying their agreements to the European Commission and seek
either a declaration of inapplicability of Article 81(1) or an individual exemp-
tion under Article 81(3).
Providers of cabotage services, particularly where they have been awarded a
public service contract and are therefore the sole operators on a particular
route, may be considered to be in a dominant position within the meaning of
Article 82 EC Treaty. Although that position must be held in a substantial
part of the common market, individual ports have been held to meet that
condition, so that condition can easily be met in the context of the cabotage
market. If the undertaking concerned holds a dominant position their market
conduct must not be abusive within the meaning of Article 82. It is the abu-
sive conduct, not the dominance of the undertaking, which is incompatible
with Article 82 EC.
Infringement of the EC competition rules may result in heavy fines,75 and
there is always the possibility of a private enforcement action given that
Articles 81 and 82 have direct effect and may be relied on in private litigation
before national courts.

71
OJ 2007 C215/3.
72
OJ 2001 C3/2. Above, note 63.
73
OJ 2004 C101/97.
74
Above, note 71 at para 10 of the Draft Guidelines.
75
Regulation 1/2003 permits fines to be imposed up to 10% of the annual turnover of the
undertakings concerned.
 application of the ec common rules on competition to cabotage 181

2. The State Aids Rules

Another important set of competition rules, particularly as far as island cabo-
tage is concerned, is those on State aids, namely Articles 87 to 89 EC Treaty.
State aids refer to subsidies and other measures which public authorities give
to industrial and commercial undertakings, and are generally considered to
distort competition by favouring certain operators. Article 73 EC Treaty com-
plements the general EC Treaty State aids provisions within the specific con-
text of the transport industry by providing two additional exceptions, one of
which is particularly relevant to cabotage services. This exception concerns aid
which is a ‘reimbursement for the discharge of certain obligations inherent in
the concept of a public service.’76 This refers to a well-defined and established
practice77 whereby the State compensates undertakings for the cost of provid-
ing services which the undertakings are required to provide by law or acts of a
public authority. Public service obligations, a concept which originates from
French administrative law, have been defined in Article 2(4) of the Cabotage
Regulation as ‘obligations which the Community shipowner in question, if he
were considering his own commercial interests, would not assume or would
not assume to the same extent or under the same conditions’.78
The objective of Article 73 EC Treaty is to ensure that national measures
adopted to coordinate transport and any State aids which may be granted
together with such measures are compatible with the Common Transport
Policy, and to allow for conditions of competition to exist. Article 87 EC
Treaty sets out the basic prohibition together with a number of mandatory
and discretionary circumstances in which State aids will be compatible with
the common market. Unlike in the EC competition rules regime described
above, the European Commission has exclusive discretion in deciding whether
the State aid meets the conditions set out in Article 87(3).79 Article 88 EC
Treaty is concerned with enforcement. The Article requires the Commission
to monitor State aids, imposes a duty on Member States to notify State aids to
the Commission before putting them into operation and provides for a
Commission investigative procedure to be undertaken.80 The most recent

76
Article 73 EC Treaty.
77
See section II.1.C above for further details.
78
The concept was originally defined in Article 2 of Regulation 1191/69 (OJ 1969 L156/1)
in the context of transport by road, rail and inland waterways. The concept has also been clari-
fied by the European Court of Justice in Case 36/73 Netherlands Railway Company of Utrecht v
Netherlands Minister of Transport and Waterways [1973] ECR 1299.
79
Article 87(3) EC Treaty permits 5 situations where the aid may be considered to be com-
patible with the internal market.
80
As far as maritime transport is concerned the Commission has adopted a series of direc-
tives in order to assist the ship-building industry.
182 rosa greaves

guidelines on State aids to maritime transport were published in 200481 and

they do apply to cabotage services.82

3. Island Cabotage and Public Service Obligations/Contracts

As already identified above, public service obligations are a common feature
of island cabotage and Member States are permitted to intervene, in a non-
discriminatory manner, where there is a market failure to provide lifeline
island cabotage.
As far as public service contracts are concerned a simplified public procure-
ment procedure is available where the maritime cabotage service to be pro-
vided to small islands which is for less than 300,000 passengers per year.83 The
simplified procedure enables Member States to have a call for expressions of
interest with no need for a formal tender call as long as the procedure is trans-
parent and non-discriminatory.84 The simplified procedure applies to both
passengers and goods, but in the latter case only where the service cannot be
provided under competitive conditions.85
When imposing public service obligations or awarding public service con-
tracts, Member States may have to provide financial compensation where the
shipping services required would not otherwise be provided by private com-
mercial operators.86 In such cases, the financial compensation itself may be
incompatible with the State aid rules and require notification to the European
Commission under Article 88 EC Treaty.
The most significant ECJ ruling on the compatibility of financial compen-
sation with the EC State aid rules is Altmark.87 Soon after the ECJ ruling, the
European Commission published a Communication on a framework for State
aid in the form of public service compensation,88 but the transport sector is
excluded from its scope.89 Although the Altmark ruling was delivered in the

81
OJ 2004 C13/3.
82
Ibid., point 2, para. 3, on the scope and objectives of the guidelines.
83
Interpretative Communication at point 5.6 as amended by COM(2006)196 final.
84
A Scottish example can be given where a six year public service contract was awarded to
CalMac Ferries Ltd in 2007 to operate lifeline ferry services for the communities of the Clyde
and Hebrides.
85
The European Commission issued a reasoned opinion under Article 226 EC Treaty to
Greece at the end of 2005 claiming that it had failed to comply with the maritime cabotage
rules. The Commission considered that Greece had not provided evidence for the need to
impose on almost all intra-island shipping services public service regimes.
86
For example, the contract awarded to CalMac Ferries Ltd (see above, note 84) included a
£43 million subsidy for the first year of operation alone.
87
Case C-280/00 AltmarkTrans GmbH, Regierungsprasidium Magdeburg v Nahverkehrsgesellschaft
Altmark GmbH [2003] ECR I-7747 (Full Court).
88
OJ 2005 C297/4.
89
Ibid., point 3.
 application of the ec common rules on competition to cabotage 183

context of inland transport, the principles set out in the ruling are of general
application. The ECJ stated that compensation for public services does not
constitute a State aid within the meaning of Article 87(1) EC Treaty where the
following four conditions are met. First, the operator of the service must be
required to discharge public service obligations and the obligations themselves
must be transparent, that is, clearly defined. Secondly, the methodology for
calculating the compensation has to have been established in advance in an
objective and transparent manner. Thirdly, the compensation must not exceed
what is necessary to cover the cost incurred in discharging the public service
obligations. Finally, where a public procurement procedure has not been
applied, the level of compensation has to be determined on the basis of an
analysis of the costs which a typical and efficient undertaking would have
incurred in discharging the obligations. In respect of the third and fourth
conditions relevant receipts and reasonable profit for discharging the obliga-
tions are to be taken into account. If the conditions are met, the Member
State has no obligation to notify the European Commission.
However, where a State aid is given, the 2004 Commission Communication
on the Guidelines on State aid to maritime transport90 sets out the parameters
within which State aid to maritime transport would be approved under Article
87(3)(c) EC Treaty91 and/or Article 86(2)92 EC Treaty, which governs under-
takings entrusted with the operation of services of general economic interest.
The guidelines reiterate that public service obligations and contracts may be
imposed on island cabotage as provided for in Article 4 of the Cabotage
Regulation.93 Public service contracts should not be awarded for longer than
six years.

90
Above, note 81.
91
This Treaty provision states that ‘aid to facilitate the development of certain economic
activities or of certain economic areas, where such aid does not adversely affect trading condi-
tions to an extent contrary to the common interest’.
92
This Treaty provision states that ‘undertakings entrusted with the operation of services of
general economic interest or having the character of a revenue-producing monopoly shall be
subject to the rules contained in this Treaty, in particular to the rules on competition, in so far
as the application of such rules does not obstruct the performance, in law or in fact, of the
particular tasks assigned to them. The development of trade must not be affected to such an
extent as would be contrary to the interests of the Community.’ The European Commission has
adopted a Decision (OJ 2005 L312/67) on the application of this Treaty provision in respect of
compensation granted to such undertakings. This Decision does not apply to inland transport
but it does to maritime transport services (paragraph 18 of the preamble and Articles 2(1)(c)
and 2(2) ). Thus compensation for the provision of public service obligations/contracts has to
fulfill the conditions set by this Decision as well as those contained in the Cabotage
Regulation.
93
Point 9 of the guidelines.
184 rosa greaves

IV. Concluding Observations

For some Member States the opening up of the maritime transport cabotage
services market was considered undesirable, particularly as far as island cabo-
tage was concerned. There were fears that private commercial undertakings,
operating under the flag of the home State, would enter the island cabotage
market but be interested only in offering shipping services on profitable routes
and avoid the host State’s manning rules. This would have been disastrous for
some remote island communities whose isolation is a matter of concern.
The Cabotage Regulation recognised the importance of island cabotage and
provided conditions that have proven sufficient to enable Member States to
ensure that shipping services are maintained on unprofitable routes where
island cabotage services are operated under public service obligations or under
public contracts where financial compensation is often granted. Nevertheless,
Greece still maintains national laws the compatibility of which with the
Cabotage Regulation is doubtful.94 Such rules make market access even more
difficult for shipping undertakings established elsewhere in the EEA as it pre-
vents them from competing for the award of public service contracts serving
the Greek islands.
Thus, as far as the island cabotage services market is concerned, the anti-
competitive practices which have been investigated to date have been limited
to failures of the Member States to implement the Cabotage Regulation and
to breaches of the EC State aid rules rather than the EC competition rules. It
is difficult to envisage much change on this market for the foreseeable future.

94
For a full discussion of these Greek national measures, see Mikroulea, A., Competition
and Public Service in Greek Cabotage, infra.
 COMPETITION AND PUBLIC SERVICE IN GREEK CABOTAGE

Alexandra P. Mikroulea*

I. Introduction
II. Greek Law 2932/2001 and its Compatibility with Regulation 3577/1992
1. Disputes under Law 2932/2001
A. Complaints
B. Proceedings before the European Court of Justice
2. The Notion of Public Service
3. Obligations of Public Service and the Conclusion of Public Service Contracts
4. Obligations for Public Service
A. Prior Acceptance of the Declaration by the Competent Administrative
Authority as a Prerequisite for Vessel Routing
B. The Notion of a Coastal Transport Network and its Mandatory or Non-
Mandatory Nature
C. Service of Lines on a Year-Round Basis
D. Determination of the Fare
5. Contracts for Public Service
6. Other Impediments to Access to the Market
A. Conditions Concerning the Shipowner
B. Manning
C. Language Requirements
D. Vessel Specifications
E. Safety of the Vessel
F. Consequential Obligations
III. Conclusion

I. Introduction

Regulation 3577/19921 revoked the privilege of coastal trading in vessels

flying the Greek flag (cabotage) and imposed harmonisation of national law
and order with the community legislation during a transitional period, and no
later than 1.1.2004. However, under the pressure of the shipwreck of the
Express Samina, Greece enacted Law 2932/20012 in an effort to liberalize
Greek coastal trading prior to expiry of the exemption deadline Greece had

* Ass. Professor, Faculty of Law, University of Athens.

1
Regulation of 7.12.1992 for the free circulation of services in maritime cabotage within
member-states, Official Gazette of European Communities L 364/12.12.1992.
2
Government Gazette bulletin A 145/27.6.2001, Shipping Law Review 29, 474.
186 alexandra p. mikroulea

been granted (on 1/11/2002).3 In this light, the law-maker liberalized the
two services of maritime cabotage between ports in the islands, i.e. regular
lines of passenger transport and ferries and transport conducted by vessels
under 650 gt.
By virtue of Article 1 of Regulation 3577/1992, maritime cabotage was fully
liberalized and the free circulation of maritime transport services was imple-
mented for Community shipowners whose vessels are registered in and fly the
flag of a Member State, provided that these vessels fulfil all conditions required
to engage in cabotage activities within the flag State.4 The provisions of this
Article clearly established, also by virtue of the ruling of the European Court
of Justice in plenum on Analir, the principle of the free provision of maritime
cabotage services within the Community pursuant to Article 49 EC. As a
result, it has since been prohibited to implement any national regulation hin-
dering the provision of services between Member States more than the provi-
sion of services strictly within a Member State, except where such regulation is
justified by imperative reasons of general interest and the measures enacted are
necessary and in accordance with the principle of proportionality.5
It should be noted that the liberalization of maritime cabotage does not
concern ancillary services such as navigation, towage, docking, stevedoring,
stowage, storage – a fact which had been disputed in the past.6 In a dispute
between the Commission and the Hellenic Republic, the European Court
found that the aforementioned services do concern maritime cabotage, but do

3
See Athanassiou, L., Issues on liberalization of Hellenic coastal trading, [2002] 30 ENΔ
(Shipping Law Review), 353 (in Greek), Farantouris, N., Shipping in Europe and the emergence
of a common maritime transport policy, Athens 2000, 115, Roussos, A., The institution of free
competition in the market of coastal trading after law 2932/2001 and Regulation 3577/1992
[2004] ΕΕμπΔ (Commercial Law Review), 204 (in Greek), Christodoulou-Varotsi, I., Regulatory
framework of sea transport in the European Community: Texts of legislation and case-law
(with references to the adjustment of Greek law and order), 2005, p. 117, idem., Issues of
interpretation and implementation pertaining to the liberalization of maritime cabotage occa-
sioned by decision of the European Court C-288/02 Commission v Greece of 21.10.2004
[2005] 33 EΝΔ (Shipping Law Review) 277 (in Greek), idem., Free provision of services in the
sector of maritime transport in light of recent case-law of the Court of European Communities
affecting Greek interests [2003] 31 ΕΝΔ (Shipping Law Review), 292 (in Greek), Sarris, The
problems of coastal traders and expectations in the “anno domini” 2004, Naftemporiki, Special
edition, June 2004, 47 (in Greek).
4
See Greaves, R., The provision of Maritime Transport Services in the European Community
[2004] 104 LMCLQ 2004, 104, Nesterowicz, M., Freedom to provide maritime transport serv-
ices in European Community Law [2003] JMLC, 629, Bredima-Savopoulou A. & Tzoannos, J.,
The Common Shipping Policy of the EC, 1990, 257.
5
See Case C-381/93 Commission v France [1994] ECR I-5145, para. 1, Case C-295/2000
Commission v Italy [2002] ECR I-1735, para. 10, Case C-435/2000 Shipping Company ltd
[2002] ECR I-10615, para. 20. As regards airport charges, see in comparison, Case C-70/99
Commission v Portugal [2001] ECR I-4845, para. 28.
6
See Athanassiou, L., op. cit. 353, 356.
 competition and public service in greek cabotage 187

not fall within the scope of application of Regulation 3577/1992.7 These are
not direct maritime transport services of passengers or cargo, but ancillary or
consequential services to maritime transport.8 A proposal for a Directive
regarding liberalization of access to the market in port services9 is currently
pending, although it was rejected and later re-submitted on 13.10.2004.10
Until such Directive is enacted, however, activities of towage, salvage at sea,
and rescue are reserved for vessels flying the Greek flag (articles 11 para.1
indent b and 188 para.2 of the Code of Public Maritime Law).

II. Greek Law / and its Compatibility with Regulation

/

1. Disputes under Law 2932/2001

A. Complaints
Mr. Zambetakis filed a complaint with the Commission11 on behalf of the
Hellenic Shipowners’ Association, arguing that Greek Law 2932/2001 does
not completely liberalize the services of maritime cabotage. However, the
Commission considers that violation of Regulation 3577/1992 may not be
substantiated as at the promulgation of the law, but merely as of 1.1.2004.
As the law was not amended after 1.1.2004, the Commission initiated pro-
ceedings for violation against Greece, and on 5.2.2004 it sent Greece a notice
of warning. After that, the Commission initiated further proceedings against
Greece regarding the implementation of Regulation 3577/1992 in that coun-
try, sending a new notice of warning on 19.4.2005.12 On 19.12.2005 a rea-
soned opinion was sent to Greece, followed by a supplementary reasoned
opinion13 on 28.6.2006. The case is still pending.

B. Proceedings before the European Court of Justice

In 2001 the Association of Coastal Shipowners and four coastal sociétés
anonymes, ANEK, Minoan Lines, Shipping Company of Lesvos and Blue Star
Ferries filed petitions for annulment with the Council of State (Conseil

7
Case C-251/04 Commission v Greece, Decision of 11 January 2007.
8
Para. 31. See also opinion of the Advocate General of 14.9.2006, paras 45, 46, 48.
9
COM 2002/101 (OJ 2002 C 181).
10
COM(2004)654 final.
11
Report 995/2002 of Mr. St. Zambetakis on behalf of the Hellenic Shipowners Association
regarding the implementation of Regulation 3577/1992 in Greece regarding maritime cabo-
tage, 3 July 2006, PE339.437/Rev.II. See also Farantouris, N., European Integration &
Maritime Transport, Athens/Brussels 2003, 298, note 337.
12
Ibid.
13
2003/5279, 2004/2321 E (2005) 5083 and 2003/5279 E (2006) 2557.
188 alexandra p. mikroulea

d’Etat) against the following regulatory ministerial decisions issued further to

the provisions of Greek Law 2932/2001:
– Decision of the Minister of Mercantile Marine nr. 3332.3/1/19.10.01
“regarding good performance guarantee of the terms of vessel routing”.
– Joint Ministerial Decision nr. 3332.3/3/19.10.01 of the Ministers of
Mercantile Marine and Aegean “regarding determination of form, content
and other required information and documents as well as similar condi-
tions for the vessel scheduling declaration”.
– Decision of the Minister of Mercantile Marine nr. 3332.3/2/19.10.01
“regarding determination of the procedure, terms, rights and obligations of
bidders, and any other matter related to tenders regarding vessel mooring
at the home port of a specific itinerary”.
– Decision of the Minister of Mercantile Marine nr. 3332.3/9/28.11.01
“regarding cessation of routing of passenger hydrofoil or high speed vessels”.
– Decision of the Minister of Mercantile Marine nr. 3332.3/10/28.11.01
“regarding determination of a General Network of coastal transport and
distinction of ordinary itineraries into categories”.
The petitioners argued that the provisions of Law 2932/2001 and the admin-
istrative regulatory acts appealed from and issued in execution of the Law
introduced an unjustified and disproportional restriction on the free provi-
sion of services within the EC (in violation of Article 49 EC) and were
incompatible with the provisions of Regulation 3577/92 which imposed the
free provision of services in maritime cabotage and, consequently, the free
routing of vessels both as to the selection of itinerary and as to the duration
of the route.
In respect of the above petitions for annulment, the Greek Council of State
issued decisions nr. 1387/2005,14 1388/2005,15 1389/200516 and 1390/200517
respectively.

14
Published in the database of the Athens Bar Association [www.dsanet.gr].
15
Legal Bench 2006 (54), 282 et seq. The decision rejected petition for annulment nr.
7448/01 for lack of grounds. The Council of State considered that the national regulation in
question was obviously justified by imperative reasons of general interest (Case C-266/96
Corsica Ferries France [1998] ECR I-3949, para. 60), according to which the protection of
safety at ports constituted a reason of general interest, sufficient to justify in principle the
restriction on the free provision of services, while the means selected by the law-maker to serve
the above legitimate purpose, i.e. the conducting of an outbidding tender in order to determine
priority as to berthing or mooring against payment of a relevant fee, was considered to be abso-
lutely expedient for bringing that purpose about.
16
Legal Bench 2007 (55), 748 et seq. The decision rejected petition for annulment nr.
207/02 as inadmissible for lack of equitable interest.
17
Published in the database of the Athens Bar Association. The Council of State judged that
the proceedings were frustrated because the appealed Ministerial Decision had ceased to apply
as of the commencement of the new scheduling period.
 competition and public service in greek cabotage 189

As regards the petitions for annulment of the Ministerial Decision

3332.3/1/19.10.01 and the Joint Ministerial Decision 3332.3/3/19.10.01,
which were heard together, the petitioners argued that the validity of the ena-
bling provisions of Law 2932/2001 was a prerequisite for the validity of the
provisions of Articles 2 to 5 of the above Law, which determined the proce-
dure of ordinary routing and obliged all shipowners participating in the pro-
ceedings to submit a relevant scheduling declaration and deposit a letter of
guarantee, as well as that the relevant provisions of Law 2932/2001 were inop-
erative, as they were incompatible with the prevailing provisions of the EC
Treaty and the Community law derived therefrom. To be precise, the petition-
ers argued that the aforementioned provisions of Law 2932/2001 were incom-
patible with the provisions of Articles 43 and 48 of the Treaty which safeguarded
the right of establishment of the nationals of a Member State in the territory
of another Member State, as well as the right of undertakings established in
accordance with the laws of a Member State having their registered seat, head-
quarters or primary establishment within the Community, to be established
in another Member State.
Appreciating that, in order to resolve the dispute, it would be necessary to
construe Article 49 EC and several provisions of Regulation 3577/92 and
Directive 98/18, the Council of State decided to adjourn the proceedings and
submitted to the European Court the following questions:
1. In the sense of article 6, paragraph 3 of the regulation [3577/92], are indi-
viduals entitled to invoke said regulation in order to challenge the validity
of provisions enacted by the Greek law maker prior to January 1st 2004?
2. In case of a positive reply to the first query, do the provisions of articles 1,
2 and 4 of regulation […] 3577/92 permit the enactment of national regu-
lations, according to which ship-owners cannot provide maritime cabotage
services save to specific itineraries determined on an annual basis by a com-
petent national authority and upon administrative permit granted within
a licensing framework with the following aspects: a) it concerns, without
exemption, all itineraries serving islands, b) the competent national author-
ities are able to accept applications for routing licenses, thus making at
their discretion and without determining a priori the applicable criteria, a
unilateral amendment on the aspects of the application concerning the
frequency and time of cessation of the itineraries, as well as the fare?
3. In case of a positive reply to the first query, is a national regulation intro-
duced in the sense of article 49 [EC], according to which the ship-owner
to whom a routing license for a specific line was granted by the
Administration (following acceptance of the relevant application of said
ship-owner as is or upon certain amendments of elements thereof, which
the ship-owner accepts) is obliged in principle to continuously serve the
190 alexandra p. mikroulea

specific line throughout the annual scheduling period and, as security for
compliance with said obligation, the ship-owner is obliged to deposit prior
to commencement of itineraries a letter of guarantee to be forfeited in
whole or in part in case of non-compliance or inaccurate compliance of
said obligation?
4. Do the provisions of articles 5, paragraph 2, and 6, paragraph 3, cases a, b,
c, f and g of directive [98/18], as same was in force during the critical
period, prior to its amendment by directive 2003/24/EC of the European
Parliament and the Council, dated April 14th 2003 [EU L 123, p. 18],
allow for a national regulation completely prohibiting the execution of
domestic itineraries by ships having completed a certain age?
The European Court issued a judgment18 on those questions, in which it
decided that when the Regulation imposed a specific time-limit on a Member
State for compliance with the obligations deriving from it, individuals could
not invoke the Regulation prior to the expiry of the relevant time-limit.19
Taking into consideration the provisions of Article 6(3), of Regulation
3577/92, the Court found that the Regulation meant that the latter’s provi-
sions could not grant rights to individuals prior to January 1st 2004 for
maritime cabotage between ports in the Greek islands as regards ordinary
itineraries for passenger transport and ferries and transport conducted by
ships of under 650 t.20
As regards the second and third questions, the European Court held that a
reply to those questions could not be of any use to the national court, as
Regulation 3577/92 could not grant any rights to individuals. It was therefore
not necessary for the Court to reply.21
As regards the fourth question, the European Court held that Articles 5(2)
and 6(3)(a) to (c), (f ) and (g) of Directive 98/18/EC meant that they were
incompatible with any national regulatory provisions imposing a complete
prohibition on the execution of domestic itineraries by vessels over a certain
age, when the Member State involved had not adopted any measures for
improving safety requirements in accordance with the procedure set out in
Article 7(4) of the Directive.22
The European Court did not reply to the abovementioned questions, and
so the case is again pending before the Council of State, where the petition for

18
Case C-285/05, OJ 2006 C 326/45. See also Stares, J., Brussels posed to drop Greece
cabotage case, Lloyd’s List Int, 16 April 16 2007.
19
Para. 17.
20
Para. 18.
21
Para. 23.
22
Para. 29.
 competition and public service in greek cabotage 191

annulment was heard on 17.4.2007. The submission of questions to the

European Court is again being contemplated.
It is, however, worth attempting to reply to the above questions.23

2. The Notion of Public Service

There has been serious argument for the fact that maritime cabotage between
islands in its entirety, especially due to its special aspects given its insular
nature, falls within the sense of public service.24
What are these special aspects?
The specificity of insular maritime cabotage mainly consists of two charac-
teristics: a) the considerable discontinuity and variation of demand between
different periods of the same year (summer-winter), which directly affects the
formation of the relevant market and b) the existence of numerous islands, the
obligation to meet heterogeneous needs and the significance of coastal trading
on the territorial continuity of a coastal country and the socio-economical
integration of island territories. The above aspects call for the consideration of
criteria beyond strictly financial ones, in order to ensure continuous, unim-
peded and sufficient maritime cabotage25 within a free market.
Whereas the distinctiveness characterizing the market for maritime cabo-
tage services has been acknowledged at a community level, Member States
have been authorized to intervene and impose specific obligations on ship-
owners wishing to become involved in a market, in order to serve general
purposes of public interest. In this direction, a system has been provided
where the Member State may either conclude contracts for public service as-
signment or impose public service obligations (Article 4 of Regulation
3577/1992).26
The aforementioned ruling of the European Court in plenum in Analir/
Spain characteristically states:

23
The Commissioner’s reply to a question from a Member of the European Parliament
dated 8 December 2003 is worth noting: “The Commission has long since indicated to Greek
authorities that it was necessary to amend the applicable law in order to comply with EEC
regulation 3577/92, especially as regards the extent of the public service, the regulations gov-
erning crews and the age limit for vessels . . . The Commission will take all necessary measures,
including the procedures applied in case of violation, if necessary, to ensure compliance with
the regulation”, E-3238/03FR .
24
See the arguments of Spain and Greece as interveners in the Analir case; see also Nesterowicz,
M., [2003] JMLC 629, Roussos, A., op. cit., 216.
25
See Roussos, A., ibid., 208, note 9.
26
See also the Report of the Commission (report nr. 4) regarding the application of
Regulation 3577/1992 on the implementation of the free provision of services in maritime
cabotage within Member States (coastal trading), 1999–2000, COM(2002)203 final, 1.1.3.
192 alexandra p. mikroulea

“.. in order to justify.. a national regulatory provision, same must be adequate

for the intended purpose and not binding beyond the extend necessary for
achieving said purpose” (para. 25).
Moreover, the relevant arguments of Advocate General Jean Mischo, which
were adopted by the European Court in the aforementioned case, stressed
that, pursuant to the Regulation, the freedom to provide services (Article 1)
constituted the rule, while the imposition of a public service regime (Article)
was the exception.27 In this sense, island transport did not constitute a service
of public interest by definition.28

3. Obligations of Public Service and the Conclusion of Public Service Contracts

The Member States are required to determine the lines on which public serv-
ice obligations29 are to be imposed.
The imposition of public service obligations concerns the ports to be served,
the regularity of the service, the continuity, the frequency, the ability to pro-
vide the service, the relevant fares and the manning of the vessel.30 The obliga-
tions to provide public service are imposed on shipowners when they, taking
into consideration their own commercial interests, would not proceed to exe-
cution to the same extent or on the same terms. This means that an examina-
tion of the services which the shipowners wish to provide and its extent should
first be conducted in order to ascertain the necessity of imposing public serv-
ice obligations. The contract of assignment of a public service is entered into
between the competent national authorities and a Community shipowner for
the purpose of providing adequate transport services. These may include
transport services on standard terms of continuity, regularity, capacity and
quality, additional transport services, transport services with standard fares
and specific terms.31 In practice, the requirements in matters of quality often
constitute part of public service contracts, but may not be included as part of
the obligation to provide a public service.32

27
See para. 26 of the Advocate General’s Opinion of 30.11.2000.
28
In the same direction see the opinion of the Greek Regulatory Authority for Maritime
Transport nr. 79/2002, [2002] 30 ΕΝΔ (Shipping Law Revue) 316 (in Greek).
29
See also Commission notice on Construction of Regulation 3577/1992, addressed to the
European Parliament, the Council, the European Economic and Social Committee and the
Committee of the Regions, COM(2003)595 final, 5.2. See also Farantouris, N., European
Integration & Maritime Transport, Athens/Brussels 2003, 282.
30
Article 4(2) Regulation 3577/1992 and article 2(6) of Greek Law 2932/2001.
31
Article 8 of Greek Law 2932/2001. See Athanassiou, L. [2002] 30 ΕΝΔ (Shipping Law
Revue) 361 (in Greek), Farantouris, N., European Integration & Maritime Transport, Athens/
Brussels 2003, 284.
32
See Commission Notice, op. cit., 5.3.1.
 competition and public service in greek cabotage 193

These two tools (the imposition of public service obligations and the
contract of assignment) serve to ensure a satisfactory level of maritime trans-
port. However, while in the case of obligations to provide a public service the
shipowner remains free to decline to provide such services, in the case of pub-
lic contracts the shipowner is bound by their terms, always in return for
consideration.33
In any case, whenever public service obligations are imposed, the Member
States should not impose obligations specifically tailored to a given shipping
undertaking, resulting in the prevention of other Community shipowners
from entering the market (principle of prevention of discrimination).
The relevant provision of the Regulation (Article 4(1) ) permits a Member
State, in respect of the same line or itinerary, to impose public service obliga-
tions on shipping undertakings and at the same time to enter into contracts
for the assignment of a public service with other undertakings for the execu-
tion of the same regular line to and from the islands. However, this requires
the existence of an actual need for a public service, as well as compliance with
the principle of equality which excludes unfavourable discrimination and is
justified in relation to the intended purpose of public interest.34

4. Obligations for Public Service

A. Prior Acceptance of the Declaration by the Competent Administrative Authority
as a Prerequisite for Vessel Routing
The law introduces a scheme of scheduling declarations on the part of ship-
owners. In particular, according to Article 4(1) of Law 2932/2001, all ship-
owners are obliged to file with the Ministry a declaration to enable them to
route vessels, where they must state the registration letters of the vessel, the
itineraries to be executed at a specific line or network lines, the home ports,
the ports of call and intermediate ports, the days and hours of departure and
arrival, and the maximum rates of the service. With respect to scheduling
declarations, which must be filed until 31/1 of each year, the administration
may request supplements and/or modifications by 20/2 of each year, in which
case the acceptance of the declaration is notified to the applicant by 31/3.
It may be argued that, under this provision, the administration is entitled
to consider that shipowners have no right to execute the itineraries they have
declared unless a decision of acceptance is issued, thus de facto converting the

33
Case C-205/99 Analir [2001] ECR Ι-1271, paras 62–64. See also Nesterowicz, M., op. cit.,
629, Athanassiou, L., op. cit., 361.
34
Para. 70. See also Nesterowicz, M., ibid., Athanassiou, L., ibid., Farantouris, N. [2002] 30
ΕΝΔ (Shipping Law Revue) 147 (in Greek).
194 alexandra p. mikroulea

regime of a mere prior declaration, which is in compliance with the Regulation,

into a regime of prior approval.
The issue which arises is whether prior administrative approval or rejection
of the relevant declaration complies with the Regulation.
In the Analir case35 the European Court found that:
“the combined provisions of articles 4 and 1 of Regulation (EEC) 3577/92
permit the provision of regular maritime cabotage services to, from and
between islands to be made subject to prior administrative authorisation
only if:
- a real public service need arising from the inadequacy of the regular trans-
port services under conditions of free competition can be demonstrated;
- it is also demonstrated that that prior administrative authorisation scheme
is necessary and proportionate to the aim pursued; (para. 40)
In the Analir case, the European Court held that the prior administrative
authorization scheme was compatible with Community legislation only in
cases where public service obligations were imposed, and in fact provided that
the principles of necessity, proportionality and prevention of discrimination
were observed36 “Therefore, if a prior administrative authorisation scheme is
to be justified even though it derogates from a fundamental freedom, it must,
in any event, be based on objective, non-discriminatory criteria which are
known in advance to the undertakings concerned, in such a way as to circum-
scribe the exercise of the national authorities’ discretion, so that it is not used
arbitrarily. Accordingly, the nature and the scope of the public service obliga-
tions to be imposed by means of a prior administrative authorisation scheme
must be specified in advance to the undertakings concerned. Furthermore, all
persons affected by a restrictive measure based on such a derogation must have
a legal remedy available to them (para. 38).
The same direction is followed by the opinion of the Regulatory Author-
ity for Maritime Cabotage (“RAMC”),37 which accepted that the routing

35
Case C-205/99 Analir [2001] ECR Ι-1271, para 40; [2002] 30 ΕΝΔ (Shipping Law Revue)
with remarks by Farantouris, N., ibid.
36
See also the views of Advocate General Jean Mischo in the same case, para. 32, “obtaining
prior authorization is mandatory to the extent necessary to oblige undertakings to provide
services they would not otherwise provide within the frames of free competition”.
37
Decision of RAMC nr. 79/2002, [2002] 30 ΕΝΔ (Shipping Law Revue) 316 (in Greek).
The case concerned the issue of the routing of two newly-built vessels on the Dodecanese line.
The routing declarations which were timely and duly filed by the shipping company were
rejected by the Minister of Merchant Marine on 23.8.2001, i.e. after 31.3.2001 which was
the deadline by which the administration was required either to request for supplementation
or impose public service obligations, otherwise it would have to accept the declaration
 competition and public service in greek cabotage 195

declaration scheme was a constituent element of the scheme of public service

obligations serving public interests and not a scheme for being granted
authorization by the administration to conduct coastal trading activities. In
such a case, the declarations scheme would be equal to an authorization
scheme which is incompatible with the liberalisation of maritime cabotage.
In this light, the result cannot be that anyone is excluded from working a
line, as this would be in direct conflict with the principle of free routing
established by the law.
The previous practice of the Ministry of subjecting all scheduling declara-
tions to approval regardless of whether it was intended to impose public
service obligations or not, was essentially equal to establishing a prior authori-
zation scheme which was incompatible with the Regulation. Moreover, in
point 37 of his Opinion, the Advocate General rejected the argument of
the Government of Spain that there was neither the need nor the ability to
examine each line to and from the islands on a case-by-case basis. In para 14,
the European Court refers to that issue as well and repeats the view of the
European Commission that it is imperative to examine each line on a case-
by-case basis in order to ascertain the need to impose obligations upon
shipowners (such as the granting of administrative authorisation for public
service lines).
In an effort to resolve the aforementioned problem and in accordance with
the new provision of Article 4(5) of Law 2932/2001, the Greek law-maker
allowed the submission of scheduling declarations even after 31/1 upon deci-
sion of the Minister and following an opinion of the Council of Coastal
Transport (“CCT”), provided that the conditions of the law were fulfilled and
transport needs were satisfied, which were not covered by vessels already
routed through regular routes or contracts. It is understandable and reasona-
ble to have a routing declaration scheme which enables the Ministry to sched-
ule appropriately. What is not reasonable is to reject an application for
participation in the scheduling simply because it is overdue. Moreover, it is
not reasonable to reject the application for routing by reasoning that the rel-
evant needs are satisfied. Whether a shipowner wishes to become active on a
line where there is already heavy competition is a business decision and is not
within the discretion of the Minister, except where there are considerations
regarding the safety of the vessel and the order of the port, or where perchance
a public service contract is involved.

as was. The shipowner resorted to RAMC, which accepted the annulment of the Minister’s
decisions. RAMC was abolished by a more recent law and its powers regarding competition law
were transferred to the Hellenic Competition Authority.
196 alexandra p. mikroulea

B. The Notion of Coastal Transport Network and its Mandatory or Non-

Mandatory Nature
In Article 2(4), the Ministry of Mercantile Marine is required to schedule in
advance, before 31/10 of each year, a coastal communications network cover-
ing all islands and ports it wishes to serve. The declaration is filed in respect of
the routing of a vessel on one or more specific lines. The network is deter-
mined by ministerial decision on an annual basis, includes all island ports and
is established upon classification of the routes into categories depending on
their significance in the domestic and international transport of the country,
its administrative structure, the arrangement of ports, the particular circum-
stances prevalent in each, and the need to ensure their regular service.38
In its aforementioned opinion 79/2002,39 RAMC considered that the net-
work was a means of detecting and checking the deficits of the free market in
adequately serving maritime cabotage, in order for the administration to
arrange for the timely satisfaction of the relevant needs by imposing public
service obligations or concluding contracts for public services. In no case,
however, should the network be regarded as a means to prevent entry to the
market or as an exhaustive list of routes ruling out the establishment or servic-
ing of any other line. What the administration can do, if it considers that
reasons of public interest call for it, is to impose justified obligations for public
service on the shipowner. It is for the shipowner to decide whether to become
active on the route in question as structured by the administration or to with-
draw. However, the administration is not entitled to refuse to accept a pro-
posed line for the sole reason that it is not included in the network.
The combined declarations and network scheme thus offers the ability to
detect and check the inadequacies of the free market in adequately serving
maritime transport. It is obvious that the declarations and network scheme is
less restrictive compared with the prior authorization scheme, as it does not
legalise the conduct of national authorities acting at their discretion, which
may deprive the provisions of Community law of their effectiveness in
practice.
The combination of the declaration and network enables the administra-
tion to detect directly, accurately and timely any possible deficiencies in the
provision of maritime cabotage services, and also serves to inform shipowners
in advance of the possible obligations which may be imposed on the route
they have selected, without requiring the prior authorization of the adminis-
tration which may distort the regime of free competition in coastal trading.40

38
Article 2(4) of Law 2932/2001.
39
Decision of RAMC nr. 79/2002, [2002] 30 ΕΝΔ (Shipping Law Revue) 316 (in Greek).
40
Athanassiou, L., op. cit., 353, 365.
 competition and public service in greek cabotage 197

Following the recent amendments to Law 2932/2001 (Article 4(5) )

permitting shipowners to submit scheduling declarations after 31/1, the
coastal communications network established by the Ministry is of a merely
indicative nature (Article 2(4) of Law 2932/2001), thus enabling shipowners
to apply for routes beyond the network. It has been argued on a Community
level that, despite the above amendment, the applicable law does not allow us
to assume that any shipowner in the Community may become freely active on
the routes of his choice merely upon notifying the Ministry of Mercantile
Marine accordingly. That is because the relevant declarations are also subject
to the prior issue of a positive ministerial decision, which depends in particu-
lar on ascertaining that these declarations correspond to needs already met
and concern the execution of itineraries for a minimum period of one year
(Article 4(5) of Law 2932/2001).
In practice, however, derogations from the network suggested by the
Ministry of Mercantile Marine have already been accepted, and no significant
problem has arisen. There were shipowners who proposed lines beyond the
suggested network in order to meet transport needs. In any case however, a
suggestion which would improve the aforementioned wording might be to
replace decisions to accept declarations with the ability of the Ministry to
reject scheduling declarations.

C. Servicing of Lines on a Year-Round Basis

The relevant provisions of Article 3(1) of Law 2932/2001 give rise to the obli-
gation to serve the line for one year, commencing from 1/11. This obligation
covers all lines, even the most profitable, without requiring prior examination
of the possible need for a public service. However, as already mentioned, not
all maritime cabotage services are public services due to their insular nature.41
Consequently, the commitment of the shipowner to provide its services for
one year is not understandable in principle, since such services are not pro-
vided in response to any public service obligations.
Prior, however, to reaching any conclusions, the particular nature of the
country of Greece should be taken into consideration, and the fact that many
islands are not favourably treated as regards their transport needs even today.
At a free competition level, it is quite reasonable for shipowners to opt to
provide their services in the summer rather than in winter. One should not
overlook the fact that many islands are isolated, considering that there is not
frequent access to them, especially during winter. One could possibly argue
that there should at least be the ability to meet the transport needs of all

41
Case C-205/99 Analir [2001] ECR Ι-1271, para 29.
198 alexandra p. mikroulea

islands within the period of one year, with the possible exception of the islands
of Crete, Rhodes, Mytilene and Chios, which are alive with traffic even in
winter. Such a time restriction of competition might be considered reasonable,
taking into consideration the special circumstances prevailing in the Greek
islands.
However, the restriction of Article 4(4)(c) of Law 2932/2001, according to
which the Ministry may modify a submitted declaration if it considers that
the frequency of routes or the scheduled time for termination of itineraries
does not correspond to the standard needs for provision of regular services
during the scheduling period, is not reasonable. The above provision leaves
room for discretion in its implementation, considering that in a liberalized
market the Ministry may not intervene and disrupt itineraries, save for rea-
sons of public interest. The only interpretation which may not give rise to
problems is the connection of the provision with the obligation for year-round
routing, in order to maintain the socio-economical bond of the islands with
continental Greece. However, the Ministry cannot intervene impetuously
and, on the pretext of the regular provision of services, impose routing terms
in a liberalized coastal trading market.

D. Determination of the Fare

The scheme which characterized Greek coastal trading was the issue of multi-
ple ministerial decisions determining the fares for passengers, vehicles and
cargo. Moreover, ministerial decisions determined the right to a discount and
the maximum rates thereof.42
There is no doubt that the ability to intervene in the determination of the
fare is allowed only where the Member States impose obligations for public
service43. An obligation for public service may be imposed only if it is ascer-
tained that the leaders of the market are not in a position to guarantee the
fulfilment of purposes of public interest.
The determination of maximum rates for all routes by the administration
regardless of whether public service obligations are imposed, without taking
into consideration the particular aspects of each route, defeats the object of
liberalization. The state may make social policy with free tickets for perma-
nent residents in marginal areas, and also for the poor, the sick and soldiers,
but not to the detriment of shipowners, as this prevents the entry of foreign

42
See Athanassiou, L., op. cit., 363, 364. See also the relevant provision of Article 178 of the
Code of Public Maritime Law, which provided for mandatory passenger and cargo fares to be
determined by ministerial decision, and prohibited any agreement to the contrary.
43
See also Lowry, N., Liberalisation spreads across Greek Ferry Routes, Piraeus to get fare
price control, Lloyd’s List Int’l, 12 September 2005.
 competition and public service in greek cabotage 199

shipowners to the Greek market. As correctly held by RAMC,44 when the

financial encumbrance resulting for shipowners from the provision of dis-
counts is not justified by reasons of public interest, it constitutes governmen-
tal intervention in the formation of rates, which prejudices business freedom
and the rules of free competition. The provision of discounts in favour of
specific persons does not entail an actual and personal benefit for the entrepre-
neur, but rather serves the general interest. It is an impermissible shifting of
costs concerning activities of government to individual entrepreneurs.
Also noted here is the opinion of RAMC 14/2003,45 which held that the
discounts constituted public service obligations and might therefore be
imposed on shipowners interested in routing their vessel upon decision of the
Ministry of Mercantile Marine and following an opinion of the CCT. A deci-
sion of the Ministry of Mercantile Marine determining the categories of per-
sons and vehicles entitled to discounts, which concerns all coastal vessels which
fall under its jurisdiction regardless of their routing, introduces a discrimina-
tion which is incompatible with the regime of coastal trading liberalization.46
After Ministerial Decision nr. 3323.1.02.08 (Government Gazette bulletin
530 of 26.3.2008), there are currently no maximum rates in every passenger
seat and every vehicle category transported by coastal vessels in the routes
linking mainland with island ports and island ports with each other, provided
that one of the following conditions is satisfied: a) the link is served by vessels
owned by at least two independent companies and the home port and port of
call each accomodate an annual number of over 150,000 passengers (boarding
and landing) based on recent statistic information and b) the home port and
port of call must each accomodate an annual number of over 300,000 pas-
sengers based on recent statistic information.
The provision of para. 8 of Law 2932/2001 should also be noted. According
to that paragraph the effect of the decision is forestalled if there are indications
of harmonized practice on the part of shipowners falling within its scope of
application, which leads to excess increase of fare prices and is in any event
detrimental to users. The inactivation of the decision will remain in force until
the issue of a final decision of discharge by the Competition Committee.
It could be argued that this provision is of a scholastic nature, as it repeats
the self-evident “the Competition Committee is competent for issues of

44
Decision of RAMC 14/2003, [2003] 31 ΕΝΔ (Shipping Law Revue) 60 (in Greek); see
Roussos, A., op. cit. 218.
45
[2003] 31 ΕΝΔ (Shipping Law Revue) 60.
46
Moreover, it was held that the decision distorts competition between undertakings serving
routes with common interim ports but under a different supervising Ministry (Ministry of
Merchant Marine and the Aegean).
200 alexandra p. mikroulea

prohibited conglomerates, harmonized practice and abusive exploitation of

dominant position on the part of ship-owners.”
There is an issue with regard to the presumption of the above provision, in
the sense that in ports without competition the state may intervene and deter-
mine a ceiling for economy class fares, in order to avoid having issues of pro-
hibition of access to the specific island area. That is, not only where there is no
competition between undertakings, but also where the number of passengers
does not exceed 300,000. There are obvious doubts about the above presump-
tion from the point of view of legal compatibility with the law of free compe-
tition, taking into consideration that there is no contract for public services in
place. It is possibly more correct to have the Competition Committee compe-
tent also where there is no competition for a specific line, considering that the
shipowner will have a dominant position on that line, in which case the fair-
ness of the fare price would be examined within the scope of abusive exploita-
tion of the dominant position.
Article 4(4)(c) of Law 2932/2001 also gives one food for thought. It says
that the Ministry may modify the declaration of a shipowner as to the fare if
it considers that the maximum rate suggested for a specific link is excessive
and inimical to public interest. It is not possible in a liberalized market to have
issues of distortion of price competition, which is the most essential factor of
a free market, nor is it possible to revert to policing market provisions on price
determination for the sole reason that the fare price is high. If the fare price
determined by the shipowner is not reasonable, there is the safeguard of the
Competition Committee which alone is competent to examine the possible
abusive conduct of a shipowning company on any given route, which has
already been held to constitute a relevant geographic market.47

5. Contracts for Public Service

Contracts of assignment of public service are provided for in Article 8 of Law
2932/2001. Such contracts are concluded upon tender for the exclusive serv-
ice of a specific line and for a period ranging from three to five years, provided
that no scheduling declarations have been filed or that those which were filed
do not correspond to the need for continuity and regularity of the coastal
communications network, for complete servicing of transport requirements,
for quality and pricing of the service (Article 8(1) of Law 2932/2001).
When the competent authority of a Member State concludes a public serv-
ice contract, it must comply with the rules regarding public commissions. The
legislation on public commissions requires an adequate degree of publicity in

47
Hellenic Competition Committee 210/III/2002.
 competition and public service in greek cabotage 201

order to ensure effective competition, as well as the creation of a transparent

selection procedure without discrimination, proportional to the intended
purpose.48
The issue which arises here concerns the exclusive nature of the line and
whether the exclusivity is in breach of the free competition provisions. In
principle, contracts for exclusive service are concluded in order to make up for
the deficiency in the market, i.e. areas where there is no business interest. In
sufficiently justified cases, exclusivity may be considered as the only expedient
means of meeting essential transport needs when it is granted for a limited
period and upon an open, equal and discrimination-free tendering process for
lowest bids at the Community level.49
In an opinion issued by RAMC, it was held that the question whether, and
to what extent, contracts of exclusive service referred to in Article 8 affected
the principle of proportionality, on the basis of which any restrictions on the
free provision of services were assessed.50 To reply to this question, one must
take into consideration the object of the contract, its duration and the possi-
ble existence of alternative, less restrictive solutions.
As regards the object of the contract, we must stress that the contract
concerns a specific line in its entirety and does not cover individual links
between islands. This means that one or more of the islands included in the
line may also be included in the scheduling declaration of any interested
shipowner.
Duration is a significant aspect to be taken into consideration when assess-
ing exclusivity. That is because long-term contracts render more difficult the
re-appearance of actual or possible competition, resulting in the eventual dis-
tortion of liberalization. The duration of five years (according to RAMC)51 or
six years (according to the Commission)52 may be considered reasonable. It is
stressed here that, in the case of small islands, i.e. those where the maximum
number of passengers transported during the year to and from the island by
sea is up to 100,000, the duration of the contracts may be 12 years. The rele-
vant invitation to express interest may be effected without an official tender,
provided that it is published at a Community level.

48
The Commission does not require Member States to announce each public contract they
conclude, unless there is financial consideration for the public service, in which case the provi-
sions regarding public grants shall apply.
49
See Commission Notice, op. cit., 5.5.1.
50
Opinion of RAMC 2/2002, [2003] 31 ΕΝΔ (Shipping Law Revue) 159 (in Greek). See
Athanassiou, L., op. cit., 365.
51
Opinion of RAMC, ibid. See also Athanassiou, L., ibid., 366, referring to air services, and
especially to the maximum duration of the assignment of a line to an air carrier, upon tender,
of three years (Article 4(1)(d) Reg. 2408/1992).
52
See Commission Notice, op. cit., 5.6.
202 alexandra p. mikroulea

As regards the question whether contracts for public service for a considera-
tion may be considered less restrictive of competition compared to contracts
of exclusive service, RAMC held that, when no monetary consideration was
involved, the statutory choice of exclusive assignment did not violate the prin-
ciple of free provision of maritime cabotage on the basis of the criterion of less
cost for the public.
The Commission considers that it is possible to impose limited public serv-
ice obligations on all carriers for the same line in parallel to those imposed by
virtue of a public service contract concluded with a carrier.53
In this case, however, the new Article 8(5) of Law 2932/200154 should be
noted here, as it says that if no proposals are submitted, or if those submitted
do not satisfy the requirements of para. (1) of the same Article, or if a need
arises due to breach of obligations on the part of a vessel scheduled either on
regular routing or by virtue of a public service contract, or if it is considered
absolutely necessary for reasons of social, economic and territorial cohesion or
satisfaction of transport needs, a tender for lowest bids will be announced
upon an opinion of the CCT in respect of the conclusion of a public service
contract for up to 12 years.
The question which arises is, first, why the duration of the public service
contract was fixed at 12 years and, secondly, whether it involves exclusivity of
the service on the line. It is not clear why the duration of the contract may be
such as to essentially exclude competition in any given line for 12 years, unless
it concerns the so-called small islands, as mentioned above. However, the law
does not specify this, leaving ample room for discretionary construction and
implementation. The sense of exclusive service does not derive from the law,
but perchance from circumstances.

6. Other Impediments to Access to the Market

A. Conditions Concerning the Shipowner
As regards the shipowner’s reliability, the fulfilment of his fiscal and insurance
obligations and the issue of a letter of guarantee for the accurate and good
performance of the terms of the routing are required among other things
(Article 3(2)(cc) of Law 2932/2001).

53
For instance, it could be a condition that a shipowner commencing the execution of an
itinerary for which a public service contract is in force, requiring that the line be operated
throughout the year, will likewise be obliged also to operate the route all the year round;
Commission Notice, op. cit, 5.5.1.
54
Supplemented by Article 27 of Law 3511/2006 (Α 258/27.11.2006).
 competition and public service in greek cabotage 203

However, it has been accepted by the Court (in Analir)55 and the
Commission56 that a Member State may examine the solvency of Community
shipowners so that they can fulfil their fiscal and insurance obligations, pro-
vided that they have been assigned public service obligations. The same may
also be true of the obligation to deposit a letter of guarantee. The Greek law-
maker moved in the right direction and ceased to require a letter of guarantee
in connection with ordinary routing, connecting it only with the public serv-
ice contract.57 However, he did not do likewise with the obligation to fulfil
fiscal and insurance obligations.

B. Manning
Article 3(2) of the Regulation provides that all matters of manning of vessels
involved in maritime cabotage activities fall within the competence of the host
country. Considering that this constitutes a derogation, it must be interpreted
narrowly. The Commission accepts that host countries are competent to deter-
mine the required proportion of Community nationals in the crews of ships
providing cabotage services between island ports and ships of less than 650
GT capacity.58 A Member State may therefore require that the crew consist
entirely of Community nationals or that sailors maintain their social insur-
ance within European Union, or even that the minimum remuneration appli-
cable in the country in question be observed.
Article (7) of Law 2932/2001 provides that all issues pertaining to ship
crew will be regulated by the provisions of Greek law. Greek regulatory provi-
sions (presidential decree 177/74) determine the number of crew members
who must be assigned to a ship in each class of seamen, exclusively in relation
to the ship’s capacity, the number of passengers she is allowed to carry and the
season of the year, without taking into account the type of the ship and its
requirements.59
A regulatory provision of that type, such as in particular the Greek provi-
sions requiring double the number of crew members compared to the relevant
provisions of other legal orders, may hinder the freedom enjoyed by the oper-
ating entities with regard to the manner of provision of the services to

55
Paras 49 and 50. See also Nesterowicz, M., op. cit, 629.
56
Commission Notice, op. cit., 5.1. In this vein, Farantouris, N. [2002] 30 ΕΝΔ (Shipping
Law Revue) 159 (in Greek) 147.
57
The obligation to provide a letter of guarantee was abolished by a law of 30.3.2006.
58
Commission Notice regarding the interpretation of Regulation 3577/1992, COM (2003)
595, 4.1.
59
See also the report of the Commission (fourth report) regarding application of Regulation
3577/1992, op. cit., 1.1.2.
204 alexandra p. mikroulea

consumers, while such hindrances do not seem to be justified by imperative

reasons of public interest. One could counter with the argument that the
manning rules also concern issues of employment and the prevention of
unemployment. However, a national regulation cannot lead to the restriction
of the liberalization of the coastal trading market and prevent the free circula-
tion of persons and employees.60
It is worth noting that the Commission,61 having considered that such der-
ogation hinders the operation of domestic market, had recommended the
amendment of the relevant provision so as to implement the rules of the host
country as to the required percentage of Community nationals, with all other
manning issues falling under the competence of the flag state. However, this
recommendation has not hitherto been accepted, but it points to a certain
direction if one indeed aims at actual liberalization.

C. Language Requirements
Article 2(7) of Law 2932/2001 provides that all non-Greek crew members
must demonstrate their knowledge of the Greek language by producing a
relevant certificate. The above provision does not distinguish between crew
members assigned to supporting passengers in case of emergency, in which
case knowledge of the Greek language would be required.
As has been correctly held by the Commission,62 as regards the rules in mat-
ters of safety and training (including the languages spoken on board), Member
States are not entitled to impose higher obligations than those provided for by
the applicable Community or international rules (STCW and SOLAS agree-
ments), without unreasonably restricting the free provision of services.

D. Vessel Specifications
According to national regulatory provisions (presidential decree 101/1995,
(Regulation for accommodation and determination of the number of passen-
gers in passenger vessels) )63 there are requirements concerning the minimum
space provided for economy class, specifications for the internal equipment of
vessels, and the determination of the products sold on board and their price.

60
See Kathimerini of 16.5.2008, p. 28, regarding the Commission’s letter on the adjustment
of Greek law to the principle of free circulation of workers, considering that Greek legislation
requires vessels to have a Greek captain and a specific number of Greek officers or seamen. The
argument goes that the captain and commander are not mere employees but are vested with
public duties.
61
COM(1998)251 final, OJ 1998 C 213/16.
62
Commission Notice, op. cit., 4.1.
63
Government Gazette Bulletin Α 61.
 competition and public service in greek cabotage 205

It goes without saying that all these specifications restrict the free provision of
services by foreign shipping undertakings, as they inhibit the free formation
of the manner of provision of services.64

E. Safety of the Vessel

As already mentioned, Greek law imposed a maximum age limit on vessels
used in maritime cabotage (35 years), while Directive 98/18/EC on safety
standards for passenger vessels does not provide for anything similar.65 The
issue of safety in navigation is fully safeguarded in a series of Community
enactments (such as Directive 98/18/EC on regulations and standards),66 so
there is no need for it to be regulated restrictively through rules imposing
completely unjustified and disproportionately onerous restrictions on the
liberalization of the relevant market. For this reason the Greek law-maker
abolished the relevant provisions.67

F. Consequential Obligations
It is also worth noting that the practice of imposing consequential obligations
on free competition lines, such as for example the obligation on a vessel also
to serve certain islands (marginal) as part of the free line, which no doubt
distorts free competition,68 unless there are reasons of public interest.

III. Conclusion

The regime introduced by Law 2932/01 included provisions which restricted

the free provision of services (Article 49 EC) and Regulation 3577/92, which
were further specialized, and thus rendered even more restrictive. The concept
of the law was based on an authorization scheme which was not justified in
accordance with the above Community provisions, as construed by the deci-
sion of the European Court of Justice in Analir. Law 2932/01 introduced a

64
See also Lloyd’s List of 21 December 2005, “Brussels marine broadside, Legal action
threatened over member states’s failure to properly implement legislation”, p. 2.
65
See also Report 995/2002 of Zambetakis, op. cit., p. 4.
66
See also Case C-140/01 of 27.2.2002.
67
Presidential decree 124/4.7.2006, implementation of the principle of free provision of
services in maritime cabotage in compliance with Regulation 3577/92 and Directive 98/18,
Government Gazette Bulletin 136, July 6 2006.
68
Compare Case 27/76 United Brands [1978] ECR 207; also Draft Notice regarding serv-
ices of general financial interest and government grants, of 12 November 2002, where it is
stated, inter alia, that Member States may not create public service obligations where such is
not justified.
206 alexandra p. mikroulea

general power of intervention by the Ministry of Mercantile Marine and, with

the indiscriminate imposition of commitments and obligations, left no room
for free activity to the entities involved in coastal trading.
Under the current regime, however, one should not overlook the fact that
significant amendments to Law 2932/2001 towards the essential liberaliza-
tion of the market have been made. Notwithstanding, Law 2932/01 does not
establish in practice the freedom to provide services in its entirety.
Of course it could be said that individual derogations such as those men-
tioned above are justified not by specific analyses and research, but by the
experience gathered by the Greek authorities on the operation of the market,
since they are aware of the inadequacy of transport services which would result
from a regime of complete liberalization, especially during winter. In any case,
however, any obligations imposed on an individual basis should be justified by
the principle of proportionality; in other words, the obligations should not be
more onerous than those necessary to achieve the intended purpose. Such
obligations are the indicative network, a scheduling scheme strictly for organi-
zational purposes but without the ability to reject overdue declarations, pos-
sibly the undertaking of an obligation for routing for one year due to the
particular nature of the Greek islands, which are characterized by low demand
during winter. The expanded view of public service, however, may lead to
chain reactions, such as the rejection of overdue declarations in case of lack of
transport needs, exclusive public service contracts for twelve years, the require-
ment for language skills for all crew members, the reduction of fares by the
Ministry, if they are not considered reasonable, and the requirement to rear-
range vessels’ interiors as prerequisites for granting authorization to partici-
pate in Greek maritime cabotage.
It is necessary for the Greek authorities to define the two regimes – free
lines and public service – and to clarify these two categories, specifying the
routes of the first or the second or both.
 A MARITIME COMPETITION READING OF REGULATION
1408/71/EC ON THE COORDINATION OF SOCIAL SECURITY
SYSTEMS IN THE EUROPEAN UNION: IS THE CURRENT
REGIME OUTOFDATE?

Iliana Christodoulou-Varotsi*

I. Introduction
II. Regulation 1408/71/EC and Maritime Competition: The Quest for Possible
Distorting Factor Aspects
1. Principles and Scope of Regulation 1408/71/EC: Brief Overview
2. The Maritime Labour Aspects of Regulation 1408/71/EC: Conflict Rules or
Alternative Substantive Rules?
III. Putting Regulation 1408/71/EC to the Test: Prospects and Limitations – the
Challenge of State Aids to Shipping
1. The Limitations on the Use of a Coordination Tool as a Maritime Competition
Tool
2. State Aids as a Means to Allow Moderation of the Uncertainties of Regulation
1408/71/EC
IV. Concluding Remarks

I. Introduction

An optimum environment from a competition point of view both for ship-

owning interests and for maritime labour via social protection measures would
seem, at least at first glance, impossible, because of the opposing interests
involved. Policy-making dilemmas of this kind are well illustrated in the area
of social protection.1 While maritime competition research has traditionally
revolved around pricing practices of shipping companies and alliances formed
with a view to increasing efficiency in the market, an important parameter
needs to be further explored in the light of the current evolution of maritime
competition, namely social protection of maritime labour. The social protection
sphere is indeed likely to operate as a noticeable competition-enhancing or
competition-distorting factor. This may well be demonstrated by differentiated

* Adjunct Professor, American College of Greece – Deree College.

1
See e.g. the impact of the International Labour Organization (ILO) maritime conventions
on the legislations of Cyprus and Greece and the ensuing repercussions on the position of the
shipowner: Christodoulou-Varotsi. I. & Pentsov D., Labor Standards on Cypriot Ships: Myth
and Reality, [2004] 37(3) Vanderbilt Journal of Transnational Law 647 seq.
208 iliana christodoulou-varotsi

conditions of employment which stimulate the competitiveness of specific

registers, while suggesting a pragmatic approach to the position of maritime
labour: a foreign (non-EU) able seaman, for example, receives total wages
ranging between €410 and €617 when he is employed on an EC-flagged
ocean-going cargo vessel under a collective bargaining agreement concluded
between the local social partners involved;2 an EU able seaman who does not
reside in a specific Member State and who is engaged aboard a vessel flying the
flag of a Member State would receive at least US$620 for 208 working hours
per month3 under its international register, while an EC seafarer of the same
rank who is under a national collective agreement which is applicable to
nationals or residents of another Member State would receive €1,495 (basic
wages and allowances included).4 Some aspects of these issues were recently
raised in European Court of Justice (ECJ) case C-438/05, commonly known
as the Viking case.5
The purpose of this chapter, however, is certainly not to focus on differenti-
ated treatment as such, which, incidentally, has been legitimized subject to
conditions both, for example, by the French Constitutional Council6 and the
German Constitutional Court7 in the context of their respective international

2
See e.g. the bilateral agreement concluded on 18.4.2005 between the Union of Greek
Shipowners and the United Trade Union of Seafarers of Ukraine (circular no 5798 of the Union
of Greek Shipowners). It should be noted that the agreement in question applies only to sea-
men recruited for service on Greek flagged dry cargo and tanker vessels “whose owners have
obtained the authority of the Greek Ministry of Mercantile Marine” (see the enabling clause of
the agreement).
3
See the minimum requirements for seafarers residing outside France under the Registre
International Français (RIF). Notably see the Ministère de l’Équipement, des Transports, du
Logement, du Tourisme et de la Mer, at http://www.rif.mer.equipment.gouv.fr/rubrique
.php3?id_rubrique=37 (last visit 30.4.2008). On the RIF, see e.g. Chaumette, P., Le marin
entre le navire et sa residence-Le Registre International Français des Navires (RIF) [2006] 2
Revue Critique de Droit International Privé 275 seq.
4
See e.g. the collective agreement which is applicable to Greek-flagged cargos (1.1.2007 to
31.12.2007). On the applicability of the principle of equal treatment concerning remuneration
to Greeks and foreigners, notably see Christodoulou-Varotsi, I., Le droit au salaire des gens de
mer étrangers en droit hellénique at Neptunus (Université de Nantes), Vol. 8, http://www.droit
.univ-nantes.fr/labos/cdmo/ (last visit 30.4.2008).
5
Case C-438/05 The International Transport Workers’ Federation (ITF) & The Finish Seamen’s
Union (FSU) v Viking Line ABP OU Viking Line Eesti, Decision of 11.12.2007 (not yet pub-
lished). On this case law in particular see Bjorkholm, M., Safeguarding EC Fundamental
Freedoms: Are Ships Blockades Exempt from the Freedom of Movement Rules?, [2007] XXV
Annuaire de Droit Maritime et Océanique 103 seq., and Reich, N., Free Movement v. Social
Rights in an Enlarged Union-The Laval and Viking Cases Before the ECJ, [2008] 9(2) German
Law Journal.
6
See CC no 2005-514 dc, 28.4.2005. See also CC 2004-509 DC. 13.1.2005 and CC no
2004-507, 9.12.2004.
7
See 10.1.1995, 1 BvF 1/90, 1 BvR 342, 348/90. See Auchter, G., Chronique de Droit
Maritime Allemand [1998] 578 DMF 56 seq.
 a maritime competition reading of regulation //ec 209

(second) registers, and in the light of the need to boost the competitiveness of
shipping against the phenomenon of flagging-out. Rather, the purpose of our
developments is to use Council Regulation 1408/71/EC of 14 June 1971 on
the application of social security schemes to employed persons, to self-
employed persons and to members of their families moving within the
Community 8 as an illustration of the impact of EU coordination rules on
social security systems on maritime competition. On this occasion, we will
briefly explore the limitations of the use of the Regulation as a maritime com-
petition instrument per se, and we will build on the use of social State aids to
shipping as a consistent means of enhancing maritime competition via social
factors, as opposed to the potential of Regulation 1408/71/EC, which is basi-
cally a coordination tool which should not be overestimated.
Regulation 1408/71/EC, which is commonly known as the Regulation on
coordination of social security systems in the EU, does not fail to deal with
maritime interests, despite the fact that among its hundreds of provisions,
which have been amended extensively over the years and which are still in the
process of change as a result of Regulation 883/2004/EC, in actual fact, only
a few of these provisions, namely Articles 13(9) and 14(b), address maritime
labour issues. Regulation 1408/71/EC coordinates the application of national
provisions relating to social protection so as to avoid legislative gaps or obsta-
cles due to conflicting legislation in the area of social protection of employed
and self-employed persons, as well as in connection with the members of their
families, in the context in which they exercise their rights of free movement in
the EU. The Regulation does not, at least directly, harmonize anything, but it
provides for conflict rules, in the same manner that international private law
instruments would do in their scope of operation. Conflict rules in question
“[…] are intended not only to prevent the simultaneous application of a
number of national legislative systems and the complications which might
ensue as a result, but also to ensure that the persons covered by Regulation
1408/71/EC are not left without social security cover because there is no leg-
islation applicable to them”.9 The principle on which the Regulation is based

8
Regulation 1408/71/EC of the Council of 14 June 1971 on the application of social secu-
rity schemes to employed persons and to their families moving within the Community, as
amended, OJ 1971 L 149/2. A consolidated version of the Regulation which may be used as a
documentation tool may be found at OJ 1997 L 28/2. A most comprehensive source of legal
information on Regulation 1408/71/EC is provided by the European funded network “Training
and Reporting on European Social Security” (TRESS) which is coordinated by the University
of Ghent, available at http://www.tress-network.org (last visit 30.4.2008). See also on the
Regulation, Free Movement of Workers and Coordination of Social Security Systems, Proceedings
of the Athens International Conference of 20–21 June 2003, Sakkoulas Publishers, 2004.
9
Case C-196/90 Fonds voor Arbeidsongevallen v Madeleine De Paep [1991] ECR I-4815,
para. 18.
210 iliana christodoulou-varotsi

is that of lex loci laboris, and in this context, “a person employed onboard a
vessel flying the flag of a Member State shall be subject to the legislation of the
State”.10 As will be seen below, this principle is subject to exceptions. However,
such exceptions should be understood in the specific context of coordination
which the Regulation endeavours to organize.
A practical illustration of the issues involved could be the following: if mar-
itime labour originating, for example, from Latvia or Poland, is engaged on
board a Greek or a Cypriot flagged vessel, according to the Regulation it
should be subject to the social protection regime of Greece or Cyprus in its
capacity as a country of registration. If, however, the seafarer is employed on
board, for example, a Greek vessel and is remunerated by an undertaking
(ship-management company or manning agency) the registered office or place
of business of which is in Poland, he shall be subject to the legislation of
Poland, provided that he resides in Poland.11 Given the competitiveness prob-
lems envisaged by the majority of registers in the EU, these conflict rules
deserve examination from the point of view of maritime competition,
by looking into possible or alternative readings of the relevant rules of
Regulation 1408/71/EC, and examining possible advantages in the area of
State aids to shipping.
In the developments below, we will briefly attempt to present the correla-
tion between Regulation 1408/71/EC and maritime labour competition first
in the light of this instrument, as well as from the viewpoint of the relatively
fragmented contribution of the European Court of Justice (ECJ) which
leaves some unanswered issues (see section II). While the contribution of
the ECJ is particularly extensive on Regulation 1408/71/EC as a whole, it
remains limited on maritime labour issues. In the context of the competition
dilemmas raised by the Regulation, it will then be examined from the angle
of its prospects and limitations (see section III). Socially-oriented State aids
to shipping will be explored further as a means potentially allowing the
moderation of the possible competition-distorting effect of Regulation
1408/71/EC in the specific context of the coordination of social security
measures relating to maritime labour. The chapter does not aim to provide a
detailed analysis of either Regulation 1408/71/EC or State aids to the mari-
time sector. Rather, its ambition is to shed light on the maritime labour
dimension of competition in shipping by suggesting a constructive approach
between Regulation 1408/71/EC and the socially-oriented State aids to
maritime transport.

10
Article 13(9)(2)(c) of Regulation 1408/71/EC.
11
Article 14(b)(4) of Regulation 1408/71/EC.
 a maritime competition reading of regulation //ec 211

II. Regulation //EC and maritime competition: the quest for

possible distorting factor aspects

1. Principles and Scope of Regulation 1408/71/EC: Brief Overview

Regulation 1408/71/EC notably provides for conflict rules which aim to
ensure that all those persons exercising their mobility rights within the EU are
not deprived of the social protection rights they are entitled to, because of the
mere fact that they have been subject to different legislations and employers at
various stages of their career path or life. Of course, these issues were not
unknown to national legislatures and were regulated in one manner or another
on the basis of bilateral social security agreements between States. The
Regulation, however, provides a Community shaping to these issues, and
while it does not invalidate bilateral conventions between Member States, it
obliges them to interpret and apply the conventions in question in line with
its provisions.
Regulation 1408/71/EC applies to employed or self-employed persons and
to students who are or have been subject to the legislation of one or more
Member States and who are nationals of one of the Member States.12 It also
applies to stateless persons or refugees residing within the territory of one of
the Member States, as well as to the members of their families and their sur-
vivors. Interestingly, the scope of the Regulation has been extended in recent
years to include persons from third (non-EU) countries who reside lawfully in
a Member State and benefit from existing mobility rules in the EU.13 Both
theory and ECJ case law have gone one step further by providing for the
enlargement of the personal scope of the Regulation to EU citizens.14
The instrument in question is based on a number of principles which we
will confine ourselves to enumerating; these principles have given rise to a lot
of ink, both in academia and in courts,15 namely: equal treatment of persons
falling within the scope of the instrument with the nationals of the host
Member State, i.e. the Member State where the activity is exercised;16
submission to the realm of the social security legislation of a single Member

12
Article 2(1) of Regulation 1408/71/EC.
13
Regulation 859/2003/EC of 14 May 2003 extending the provisions of Regulation
1408/71/EC and Regulation 574/72/EC to nationals of third countries who are not already
covered by those provisions solely on the grounds of their nationality, OJ 2003 L 124/1.
14
Case C-85/96 Martinez Sala [1998] ECR I-2691. See also Mavrides, P., La protection
sociale des marins dans le droit communautaire, Les Journées d’Étude de l’Observatoire des
Droits des Marins, Nantes, 2006, p. 211 seq.
15
See, supra, note 8.
16
Article 3 of Regulation 1408/71/EC. See also, inter alia, Case C-333/2000 Maaheimo
[2002] ECR I-10087.
212 iliana christodoulou-varotsi

State;17 application of the law of the Member State where the activity involved
takes place (subject to a number of exceptions);18 the principle of aggregation
of insurance periods spent in different Member States and the principle of
pro-rata payment19 with regard, for example, to the calculation of old-age
pensions; and the principle of exportability or deterritoriality of benefits with
regard to certain entitlements only, e.g. in the context of invalidity benefits,
occupational accidents, etc.
It deserves special mention that Regulation 1408/71/EC was replaced by
Regulation 883/2004/EC,20 which, however, does not currently apply. The
new regulation, which does not alter the rules of Regulation 1408/71/EC as
far as maritime labour is concerned,21 will apply from the date of entry of the
implementing regulation, which is currently under elaboration.22 The purpose
of the adoption of this instrument was both “modernization” and “simplifica-
tion” of EU rules on the coordination of national security systems.23 It is not
in the intention of this chapter to elaborate further on the anticipated contri-
bution of the new instrument. From the angle of applicable positive law, the
point of reference remains Regulation 1408/71/EC.
Seafarers who are engaged at different stages of their professional life aboard
various EU-flagged vessels should be able to benefit from special rules which
are contained in Regulation 1408/71/EC. As mentioned above, a person
employed on board a vessel flying the flag of a Member State will be subject
to the legislation of that State.24 Yet, Article 14(b) of the Regulation provides
some special rules on maritime labour or on labour connected with the ship-
ping industry, which will be examined in a selective manner in the develop-
ments below.

2. The Maritime Labour Aspects of Regulation 1408/71/EC: Conflict Rules

or Alternative Substantive Rules?
Article 14b of the Regulation provides some special rules on maritime labour,
and self-employed persons in the maritime sector, in addition to the rule of

17
Article 13(9) of Regulation 1408/71/EC.
18
Article 13 of Regulation 1408/71/EC.
19
Article 45 of Regulation 1408/71/EC.
20
Regulation 883/2004/EC of the European Parliament and of the Council of 29 April
2004 on the coordination of social security systems (Text with relevance for the EEA and for
Switzerland), OJ 2004 L 166/1.
21
Article 11(4) of Regulation 883/2004/EC.
22
The implementing regulation, which at this stage is pending, will replace Regulation
574/72/EC of the Council of 21 March 1972 fixing the procedure for implementing Regulation
1408/71/EC, OJ 1972 l 74/1.
23
See recital 3 of the Preamble to Regulation 883/2004/EC.
24
Article 13(9)(2)(c) of Regulation 1408/71/EC.
 a maritime competition reading of regulation //ec 213

the submission of seafarers to the applicable law of the country of registration.

Article 14(b) states the following:
1. A person employed by an undertaking to which he is normally attached,
either in the territory of a Member State or on board a vessel flying the flag
of a Member State, who is posted by that undertaking on board a vessel
flying the flag of another Member State to perform work there for that
undertaking shall, subject to [the] conditions [provided …], continue to
be subject to the legislation of the first Member State.
2. A person normally self-employed, either in the territory of a Member State
or on board a vessel flying the flag of a Member State and who performs
work on his own account on board a vessel flying the flag of another
Member State shall, subject to [the] conditions […], continue to be sub-
ject to the legislation of the first Member State.
3. A person who, while not being normally employed at sea, performs work
in the territorial waters or in a port of a Member State on a vessel flying the
flag of another Member State within those territorial waters or in that port,
but is not a member of the crew of the vessel, shall be subject to the legisla-
tion of the first Member State.
4. A person employed on board a vessel flying the flag of a Member State
and remunerated for such employment by an undertaking or a person
whose registered office or place of business is in the territory of another
Member State shall be subject to the legislation of the latter State if he is
resident in the territory of that State; the undertaking or person paying the
remuneration shall be considered the employer for the purpose of the said
instrument.
In the context of the last paragraph of Article 14(b), French fishing vessels
the crews of which were Spanish nationals residing in Spain and were engaged
and remunerated by a Spanish manning undertaking also established in Spain
provoked some friction concerning the fact that the seafarers in question were
subject to the Spanish social insurance regime, instead of that of France, which
was the flag State.25 Apparently, social cover provided by the French social
insurance body (ENIM) was deemed to be more expensive to ship-owning
interests than the Spanish one, and Article 14(b)(4) of Regulation 1408/71/
EC provided a foundation for more competitive conditions of employment
from the point of view of the owners of the fishing vessels involved. Another
aspect of the issue concerned the fact that the vessels in question were registered

25
See Chaumette, P., Les marins sont-ils encore à bord?-La separation de l’armateur-
L’exemple des navires dits franco-espagnols [2005] XXIII Annuaire de Droit Maritime et
Océanique 179 seq.
214 iliana christodoulou-varotsi

in France and not in Spain, in order to benefit from French fishing quotas.
Under French law, seafarers are subject to the law of the registration country,
including for their social protection cover, and the principle which prevails is
that of unity of the ship-owner (armateur) in all his dimensions which relate
him to the personnel on board, which simply means that under French law
the shipowner is considered to be the employer of seafarers.26 It should be
noted that the relevant provision of Regulation 1408/71/EC does not distin-
guish between fishing vessels and merchant marine vessels.
Technically, the conditions provided for by the Regulation were present:
the seafarers were employed on board a French vessel and remunerated by an
undertaking in the territory of Spain. Spanish seafarers had their residence in
Spain, and the undertaking which was paying them was considered to be
their employer. This practice, however, provoked some scepticism;27 the prac-
tice in question raised the issue of whether it was antithetical both to French
law and to the spirit of Regulation 1408/71/EC. The Regulation, in its
capacity as a socially-oriented instrument, should probably not be consid-
ered a source of alternative rules, but only an instrument containing conflict
rules on the coordination of social security systems.28 We are at the heart of
the issue.
With the exception of the well-known ECJ case, Firma Sloman Neptun,29
and the more recently decided case of Viking,30 the Court has not been given
the opportunity to address maritime labour issues from the viewpoint of com-
petition-enhancing or competition-distorting factors. It should be recalled
that in the Firma Sloman Neptun case, the Court decided that the application
by a Member State to merchant vessels entered in its international (second)
shipping register of a system where seafarers who are nationals of third (non-
EU) countries and who have no permanent abode or residence in that Member
State enjoy less favourable conditions of remuneration than those applicable
to seafarers who are nationals of that Member State does not constitute State
aid within the meaning of Article 92(1) of the EC Treaty. Moreover, in
the recently decided case, Viking, the ECJ explored further the issue of how
far labour unions can take social action against the re-flagging of a shipping
company from a “high-wage country” (Finland) to a “low-wage country”
(Estonia).31

26
Ibid., 193. It should be noted, however, that the regime applicable to the RIF is different
in that respect; see supra note 3.
27
Ibid., 197.
28
Ibid.
29
Case C-72/91 & C-73/91 Sloman Neptun Schiffahrts AG v Seebetribsrat Bodo Ziesermer der
Sloman Neptun Schiffahrts AG [1993] ECR I-887.
30
See supra note 5.
31
See Reich, op. cit.
 a maritime competition reading of regulation //ec 215

The ECJ did, however, shed light on some maritime labour aspects of
Regulation 1408/71/EC; in Madeleine De Paep,32 which was decided in the
early 1990s, a mariner was engaged on board a vessel flying the flag of a
Member State (U.K) other than the one in which the undertaking remunerat-
ing him had its registered office (Belgium). The mariner indeed had his resi-
dence in the same Member State as the undertaking which was remunerating
him, i.e. Belgium. Following a tragic occupational accident on board the ves-
sel, the question raised dealt with the determination of the legislation applica-
ble to the employment relationship. One the one hand, the application of a
provision of the Belgian social security legislation was precluded because of its
restrictive nature; the provision in question was making affiliation to the social
security scheme and the validity of the mariner’s contract of employment sub-
ject to the condition that the vessel would be flying the national flag; on the
other hand, British social security legislation was also restrictive, since it pro-
vided for a residence requirement in the United Kingdom. The mere opera-
tion of national rules would have deprived the applicant of a number of
entitlements, a situation which was finally avoided because of the operation
of the Regulation33 precluding the discriminatory provisions of Belgian
legislation.
It should be noted that Regulation 1408/71/EC equally applies in principle
to international (second) registers, since the latter are subject to EC law. It
may be recalled that these registers are different from the so-called offshore
registers, which belong to territories which have a greater or lesser autonomy
in relation to the Member State;34 international registers are attached directly
to the State which created them.35 If, for example, a Latvian seafarer who has
his residence in France is engaged aboard a French vessel registered at the
Registre International Français (RIF),36 he will benefit from the more favour-
able regime, which is also available to the other crew members, regardless of
their nationality, who have their residence in France.37 If the same seafarer
spends five years of employment under French law and then decides to return
to Latvia where he establishes his residence, and he is subsequently engaged

32
Case C-196/90 Fonds voor Arbeidsongevallen v. Madeleine De Paep [1991] ECR I-4815.
33
See Article 14(2)(c) of Regulation 1408/71/EC.
34
See point 1 of Community guidelines on State aid to maritime transport, COM(2004)43
(2004/C 13/03).
35
Ibid.
36
On the RIF notably see de Richemont, M.H., de Rohan, J., Oudin, J., Gélard P. & Lanier,
L., Exposé des Motifs sur la Proposition de loi relative à la creation du registre international
français (Sénateurs), document no 47, available at http://www.senat.fr/leg/pp103-047.html
(last visit 30.4.2008).
37
See the Ministère de l’Équipement, des Transports, du Logement, du Tourisme et de la Mer
http://www.rif.mer.equipment.gouv.fr/rubrique.php3id_rubrique=37 (last visit 30.4.2008).
216 iliana christodoulou-varotsi

via a local agency aboard a Cypriot vessel, if he receives his wages from a
Latvian undertaking, according to Regulation 1408/71/EC, he will be subject
to Latvian law, including social protection and wages.38 If we assume that the
seafarer spends three years aboard a Cypriot vessel, at the end of his career, the
periods spent aboard the French and the Cypriot vessel will be taken into
consideration for his pension rights. Subjecting the seafarer to the law of the
flag State or the law of the State of residence is synonymous with differenti-
ated entitlements. The use of Regulation 1408/71/EC as a maritime competi-
tion tool per se does not fail to raise the risk of a certain inconsistency, mainly
from the point of view that the Regulation was not perceived as a tool provid-
ing advantages to the employer, but rather as a tool of protection for the
employee. In this context, alternative provisions allowing enhanced competi-
tive advantages will have to be sought from other sources. Socially-oriented
State aids could constitute the playing field of such action.

III. Putting Regulation //EC to the Test: Prospects and

Limitations – the Challenge of State Aids to Shipping

1. The Limitations on the Use of a Coordination Tool as a Maritime

Competition Tool
In the context of fierce competition, especially with regard to international
freight transport, the submission of seafarers to the legislation of the flag State
by Regulation 1408/71/EC may often be viewed as antithetical to ship-
owning interests.39 The adoption of a new Regulation, namely Regulation
883/2004/EC, which is not yet applicable, demonstrates, however, that the
status quo has been maintained; after all, if the above-mentioned rule has not
been amended and seafarers continue, in principle, to be subject to the legisla-
tion of the flag State for the purposes of their social security and wages40, this
seems to suggest that from the angle of the European drafters the Regulation
was not intended to constitute a response to the problem of competitiveness
of the maritime industry.
Two provisions are likely to be used by ship-owning interests with a view to
boosting their competitive positions; first, Article 14(b)(4) of the Regulation,
according to which “A person employed on board a vessel flying the flag of
a Member State and remunerated for such employment by an undertaking or

38
Article 14(b)(4) of Regulation 1408/71/EC.
39
See TRESS 2007 European report, at 44, available at http://www.tress-network.org
(last visit 30.4.2008).
40
Article 11(4) of Regulation 883/2004/EC.
 a maritime competition reading of regulation //ec 217

a person whose registered office or place of business is in the territory of

another Member State shall be subject to the legislation of the latter State if he
is resident in the territory of that State; the undertaking or person paying the
remuneration shall be considered as the employer for the purpose of the said
instrument”. To some extent, the use of this provision was discussed in the
context of French fishing vessels with Spanish personnel being remunerated
in Spain.
Another possible option would be Article 17. As will be seen, this provision
is subject to reservations. Article 17 of the Regulation states that two or more
Member States or the competent authorities of those States may, by common
agreement, provide for exceptions to the provisions of Articles 13 and 16 of
the regulation, in the interests of certain workers or categories of workers. In
other words, Article 17 allows exceptions to be made in order to cover other
situations which, although not specifically provided for in Title II of the
Regulation, call for a solution which differs from those adopted in Articles 13
to 16. It should be recalled that Article 13 lays down the general principle that
a worker is to be subject, with regard to social security matters, to the legisla-
tion of the Member State in the territory of which he is employed. Special
rules are set out in Articles 14 to 16 of the Regulation. The task of identifying
those situations which call for a solution which differs from those adopted in
Articles 13 and 16, and determining the legislation to be applied, is entrusted
by Article 17 to the Member States concerned, which may, by common agree-
ment, derogate from Articles 13 to 16, provided the agreement is concluded
“in the interests of certain workers”.41
In the light of Article 17, an administrative agreement was, for example,
decided between the United Kingdom and the Netherlands in a context in
which a Dutch national had worked in the UK from 1964 to 1977 while
being voluntarily subject to the Dutch social security scheme.42 According to
the agreement, the person concerned was to be regarded as subject to the
Dutch social security scheme for the period ending on 31 December 1977;
however, as from that date UK legislation was to be applicable to him.
It should be borne in mind that Member States enjoy wide discretion with
regard to the use of Article 17 the only limitation on which stems from the
interests of the workers. Interestingly, Article 17 was used by the competent
social security administration of Norway, which is a European Economic Area
(EEA) Member to which Regulation 1408/71/EC applies, with the compe-
tent social security administration of Latvia. Seafarers from Latvia who are

41
Case C-101/83 Raad van Arbeid v P.B. Brusse [1984] ECR 2223, para. 17.
42
Ibid.
218 iliana christodoulou-varotsi

engaged aboard a vessel in the Norwegian International Ship Register (NIS)

are subject, by virtue of a provisional agreement dated 18.11.2004, which was
renewed for an indefinite period, to the social insurance legislation of Latvia.43
As a result, an E 101 document was provided by Latvia to the seafarers in
question, this normally being furnished in the case of a posting not exceeding
twelve months. It is noteworthy that the Norwegian International Ship
Register is in Bergen, Norway, and accepts the registration of passenger and
cargo ships provided that they do not operate between Norwegian ports or are
not engaged in regular scheduled passenger transport between Norwegian and
foreign ports.44 Under this regime, collective wage agreements may be con-
cluded with Norwegian or foreign trade unions.45
It seems that Article 14(b)(4) and Article 17 of the Regulation constitute
the grounds which are likely to provide a competition-enhancement factor
from the viewpoint of the ship-owner. On the one hand, the use of Article 17
with regard to the maritime labour situation would tend, in our opinion, to
be challenged on the basis of the requirement related “to the interests of the
workers”; on the other hand, it is not clear whether Article 14(b)(4) was
intended to provide an incentive to ship-owners, even though in practice it
succeeds in doing so. In other words, should ship-owning interests confine the
task of remuneration of the seafarer to undertakings established in the same
country as the maritime labour concerned, in order to shift from the flag
State’s legislation to legislation of the country of residence, or is the provision
in question intended to provide an answer to a situation which simply exists
and which is not governed by the competition-enhancing rationale? It is rel-
evant that when the competition-distorting aspect of Article 14(b)(4) was
noted with regard, for example, to the abovementioned issue of French-
Spanish fishing vessels, this was done from the viewpoint of the protection of
seafarers’ interests, and had as a point of departure the restrictions provided
for by national law, i.e. French legislation, with regard to the dichotomy
between the status of ship-owner and the status of the employer who is actu-
ally paying the crew.
To the extent that these issues cannot be answered with certainty, social
State aids to shipping may presumably provide a more solid playing field in
the quest for competition-enhancing factors, without compromising the
position of maritime labour or overestimating the potential of Regulation
1408/71/EC.

43
See VSAA State Social Insurance Agency, at http://www.vsaa.lv/vsaa/content/?cat=1677
&1ng=en (last visit 30.4.2008).
44
Article 4 of Act of 12 June 1987 No. 48.
45
Article 6 of the Act, ibid.
 a maritime competition reading of regulation //ec 219

IV. State Aids as a Means to Allow Moderation of the

Uncertainties of Regulation //EC

It is not our intention to provide a detailed analysis of State aids to shipping;46

rather, our purpose is to provide a brief overview of the regulatory framework
of State aids to shipping as a means to allow moderation of the possible com-
petition-distorting effect of Regulation 1408/71/EC, or at least the controver-
sial aspects of the Regulation which do not seem to provide a clear answer to
the problem of competitive shipping in the EU.
The need both to improve the competitive position of shipping in the EU
from the viewpoint of labour-related costs in order to avoid the flagging-out
of tonnage, and to ensure that the position of maritime labour is not compro-
mised has led the European Commission to a pragmatic approach to State
aids to shipping. In 1989, the Commission defined its first guidelines in this
area in order to ensure convergence between the actions of the Member States.
The guidelines in question, which “proved to be ineffective and the decline of
Community fleets continued”47, were accordingly renewed by means of a
1997 communication defining new Guidelines on State aid to maritime trans-
port.48 The 1997 Guidelines were replaced by Commission communication
C(2004)43, the aim of which is “to set the parameters within which State aid
to maritime transport will be approved, pursuant to Community State aid
rules and procedures, by the Commission under Article 87(3)(c) and/or
Article 86(2) of the Treaty”.49
Revised Guidelines apply from 17 January 2004, and are valid until 2011.
The Guidelines cover any aid granted by Member States or through State
resources in favour of maritime transport. State aids to shipbuilding are not
covered. The general objectives of the revised State aid guidelines are the
improvement of the safety of maritime transport, the encouragement of flag-
ging or re-flagging to Member States’ registers, the consolidation of the mari-
time cluster established in the Member States while maintaining an overall
competitive fleet on world markets, the improvement of maritime know-how,

46
On State aids in the EU and in the shipping sector in particular, see Farantouris, N.,
European Integration and Maritime Transport, Ant.Sakkoulas/Bruylant, 2003, Nicolaides, Ph.,
Kekelekis, M. & Buyskes P., State Aid Policy in the European Community: A Guide for
Practitioners, Kluwer, 2005, and Athanassiou, L., EC State Aid Law and Shipping [1997] 50
RHDI 1997, 403 seq. See also the brief overview of Haralambides, H. E., Current Challenges
in European Shipping Policy, BIMCO Bulletin, Vol. 91, February 1996, 6 seq.
47
See Community guidelines, COM(2004)43, op. cit., note 34, at 1.
48
Community guidelines on State aids to maritime transport (97/C 205/05), OJ 1997
C205/5.
49
See Commission guidelines, COM(2004)43, op. cit., note 34, at 2.
220 iliana christodoulou-varotsi

and contribution to the promotion of new services in the field of short

sea shipping.50
It deserves special mention that State aids may generally be granted only in
respect of ships entered in Member States’ registers. These comprise the
“standard” and “second” registers which are governed by the law of a Member
State. Only exceptionally may aid be granted to ships entered in the so-called
offshore registers, i.e. registers which are located in and subject to the law of
territories where the EC Treaty does not, in whole or in substantial part, apply.
Such exceptional treatment would be possible provided that ships entered in
offshore registers complied with the international standards and Community
law, that they operated from the Community, that the ship-owner was estab-
lished in the Community, and that the Member State concerned demonstrated
that the register contributed directly to the objectives mentioned above.51
Measures which are intended to improve competitiveness are notably fiscal
and social. The most attractive fiscal measure is tax tonnage, where the ship-
owner pays an amount of tax linked directly to the tonnage operated, and the
tonnage tax is consequently payable irrespective of the company’s actual profits
or losses.52 The European Commission has stressed that the eligibility of an
activity under the Guidelines depends on whether the activity is “intrinsically
linked with maritime transport”.53 The emphasis will be placed below
on social measures and on practices followed by a selective number of
Member States.
It is evident that support measures intended for the maritime industry
should aim to deal with the issue of labour-related costs.54 While under
Regulation 1408/71/EC the ship-owner subjects the seafarer, in principle, to
the flag State’s regime or, if certain conditions are met, to the regime of the
State of residence of the seafarer, from the angle of State aids, the ship-owner
does not have to overestimate the dilemma between the one legislation and
the other; he is naturally led to apply the law of the flag State; in general, both
the ship-owner and the seafarer will benefit from State aids. The “frictions”
caused or implied by the Regulation - which was not designed to provide

50
Ibid., 2.2.
51
Ibid.
52
See Commission guidelines, COM(2004)43, op. cit., note 34, at. 3.1.
53
See the tax measures envisaged by Belgium in the maritime field in Commission Decision
2005/417/EC of 30 June 2004, OJ 2005 L 150/1.
54
The issue of labour-related costs of maritime transport has attracted the attention of the
International Labour Organization (ILO) from the point of view of the protection of maritime
labour. Notably see ILO, The Impact on Seafarers’ Living and Working Conditions of Changes
in the Structure of the Shipping Industry, Geneva, JMC/29/2001/3, at 26 seq., and
Christodoulou-Varotsi, I. & Pentsov, D.A., Maritime Work Law Fundamentals: Responsible
Shipowners, Reliable Seafarers, Springer, 2008.
 a maritime competition reading of regulation //ec 221

a maritime competition incentive, but was mainly perceived to be in the

interests of the employee–are avoided.
Under the current regime, which is the one defined by the 2004 revised
Guidelines, action on employment costs should be allowed for Community
shipping, by means of reduced rates of social insurance contributions for
Community seafarers employed on board ships registered in a Member State,
as well as by means of reduced rates of income tax for Community seafarers
on board EC ships.55 Aid to maritime employment is permitted in so far as it
directly stimulates the development of the sector and employment rather than
providing general assistance. The term “Community seafarer” should be
understood in a broad sense, i.e. Community/EEA citizens, in the case of
seafarers working on board vessels providing scheduled passenger services
between ports of the Community,56 and all seafarers liable to taxation and/or
social security contributions on a Member State in all other cases.57 It should
be noted that in addition to the aid related to labour related costs, training aid
and support for short-sea shipping are also possible under certain conditions.
Reference to a number of Member States may provide an indication of the
overall situation: In Belgium, for example, part of social security contribu-
tions paid by the employer has been removed in the shipping sector, as has
part of the seafarers’ contributions.58 In Denmark ship-owners contribute an
amount to social security for each seafarer.59 In France, social charges paid by
employers for seafarers were partially refunded by the Administration for the
years 1998, 1999 and 2000 on certain conditions relating to training, employ-
ment and the evolution of the fleet; it seems that from 2001onwards all such
charges are reimbursed.60 In Germany, ship-owners are allowed to keep 40%
of seafarers’ income tax deducted at source when seamen are employed for
more than 183 days.61 In the Netherlands, taxes and social insurance contri-
butions are not paid for ships flying the Dutch flag if the shipping company
operating the ship has a genuine and permanent establishment in the
Netherlands.62
The seafarer also benefits from the support in question: The United
Kingdom uses a system where no taxes on wages are paid if the seafarer is away

55
See Commission guidelines, COM(2004)43, op. cit. note 34, at 3.2.
56
This includes ro-ro ferries.
57
See Commission guidelines, COM(2004)43, op. cit. note 34, at 3.2.
58
See European Shipping Policy 2004 - A Maritime Information & Analysis Report,
Sjofartens Analys Institute Research, 18 June 2004, at 17. See also Farantouris, N., op. cit.
note 46, at 401.
59
Ibid., 9.
60
Ibid., 21.
61
Ibid., 22.
62
Ibid., 26.
222 iliana christodoulou-varotsi

from the country for more than 183 days per year.63 In Denmark, Danish and
foreign seafarers engaged on board vessels in the Danish International Ship
Register (DIS) do not pay taxes on wages.64 In Greece, seafarers are subject to
reduced rates of social security contributions compared to the rates in other
economic sectors, and income tax is low.65 In Italy, a full exemption from
social contributions is provided for Italian/Community seafarers on board
vessels registered in the second Italian register (IIR).66

IV. Concluding Remarks

The labour-related parameter should not be underestimated as regards its

impact on maritime competition. This is very clearly demonstrated by the
effort to provide a maritime competition interpretation of Regulation
1408/71/EC, the regulation being primarily a tool of coordination of social
security schemes which aims to ensure the protection of migrant workers,
including mariners. The existing framework on State aids to shipping, which
focuses on fiscal and social support, may be viewed as a consistent approach
to competitive shipping which avoids overestimating the “conflict” relating to
the choice of the legislation applicable to the seafarer, i.e. flag State or State of
residence, especially at the level of social security protection and wages. In any
case, EC law and policy have reached a mature point of development which
allows the taking into consideration, in a realistic and non-dogmatic manner,
of the urgent need to boost the competitiveness of European shipping, with-
out compromising the quality of the human element.

63
Ibid., 9.
64
Ibid., 18.
65
Ibid., 22. See also Article 14 of Law 2992/2002 (Official Journal of the Hellenic Republic
54 A’), as amended.
66
See European Shipping Policy 2004, op. cit. note 58, at 24.
 PART III

COMPETITION DISTORTING FACTORS

 FISCAL AID FOR MARITIME TRANSPORT

Phedon Nicolaides*

I. Introduction
II. When do Fiscal Measures Constitute State Aid?
III. The Problem with Fiscal Aid
IV. Fiscal Aid Measures Permitted by the Maritime Transport Guidelines
1. Conditions
2. Shipownership v Ship Management
V. Problematic Issues in the Guidelines
1. Ring-Fencing (Preventing Non-Maritime Activities from Deriving Benefits
from Fiscal Aid Granted to Maritime Activities): Case C 5/2007 (ex N
469/2005) (Denmark)
2. Ineligible Maritime Activities: Cases C 58/2007 (ex N 240/2007) (Denmark)
3. The Link between Maritime Transport and Other Maritime Activities: Case C
22/2007 (ex N 43/2007) (Denmark)
4. Taxation of Companies v Taxation of Persons: Case N 93/2006 (Poland)
5. Location of Companies: Case N 93/2006 (Poland)
6. Deduction of Social Security Contributions from Tonnage Tax Liability: Case
N 93/2006 (Poland)
8. All-or-Nothing Option for Tonnage Tax for Ten Years: Case N 93/2006 (Poland)
VI. Assessment and Conclusions

I. Introduction

Operating aid is not normally allowed in the European Union. However,

operating aid in the form of reduced tax, i.e. fiscal aid, is currently possible
under certain conditions in maritime transport.
There are two primary reasons why operating aid may exceptionally be
granted to shipping companies. First, this kind of aid seeks to counterbalance
similar advantages enjoyed by non-EU companies. Secondly, it aims to encour-
age re-flagging of EU-owned vessels which have been registered under non-
EU flags.
The motive for supporting maritime transport so generously through oper-
ating aid is that shipping and the related skills and knowledge base are thought
to be essential for the European economy.

* Professor at the European Institute of Public Administration, Maastricht (NL). I am grate-

ful to Thomas Kazakos for comments on an earlier draft and to Kristina Kratochvilova for
research assistance.
226 phedon nicolaides

The purpose of this chapter is to examine the conditions under which fiscal
state aid may be granted to shipping companies. The chapter starts by consid-
ering how fiscal or tax measures may constitute state aid. Then it explains the
problems created by operating aid and fiscal aid, in particular in the context
of the system for the control of state aid which has been developed by the EU.
It goes on to review the European Commission Guidelines on aid to maritime
transport and analyse a number of recent Commission decisions to launch
formal investigations on the tax schemes of several Member States. It con-
cludes with an assessment of the contentious issues of the Guidelines. An
Annex provides the interested reader with summary information on three
typical schemes for the fiscal treatment of seafarers.
The main conclusion of the chapter is that the most difficult aspect of the
application of the current state aid rules to maritime transport is the question
of what income from ship operations is eligible for favourable tax treatment.
The answer depends in turn on what is regarded as constituting shipowning
and ship management. In principle, a shipowner or ship manager assumes
responsibility for the operations of a vessel. The line between shipownership
and ship management proper, on the one hand, and involvement in other
ship operations, on the other, is to a large extent arbitrary, especially in view
of today’s business practices in maritime transport, where the operation of
vessels is segmented and carried out by different companies, often located in
different countries.
In view of the fact that it is not really possible a priori to identify which
operations of a vessel are more valuable in terms of their contribution to the
European economy and to the maintenance of a strong maritime knowledge
base and skills in Europe, a more efficient and less complex approach would
be to allow the same tax treatment of all income derived from genuine mari-
time activities.

II. When do Fiscal Measures Constitute State Aid?

State aid in the EU common market is in principle prohibited by Article

87(1) of the EC Treaty. The concept of state aid is wider than that of a subsidy
(C-30/59, Steenkolenmijnen Limburg v High Authority). It includes any
measure which mitigates the charges which are normally borne by the budgets
of firms. A tax is such a charge.1 Therefore, Article 87(1) EC applies to state
aid in tax measures because their fiscal (or social) nature is not sufficient
to exclude them from the scope of that Article. This is because whether a

1
C-387/92, Banco Exterior de Espana; C-75/97, Belgium v Commission; C-66/02, Italy v
Commission.
 fiscal aid for maritime transport 227

measure is aid is determined on the basis of its effects and not its nature or the
policy intentions of the public authority which has adopted that measure.
(C-173/73, Italy v Commission).
Since a tax – which is a charge – is a burden on the budgets of firms it can-
not be state aid within the meaning of Article 87(1) EC (C-390/98, Banks).
However, Article 87(1) EC does apply to those aspects of tax systems such as
tax exemptions or reductions and other forms of favourable treatment which
reduce partially or fully the burden of the full tax or normal treatment.
A tax exemption or reduction places beneficiaries in a more advantageous
position than their competitors (C-6/97, Italy v Commission). Therefore, the
following would normally be found to constitute state aid:
i. reduction of the tax base
ii. reduction of the rate of tax
iii. deferment, cancellation or rescheduling of tax debt. Delay in collecting
taxes may also be aid unless justified by the private-creditor principle
(C-256/97, DMT )
iv. reduction of employers’ or employees’ social insurance contribution
v. advantages to shareholders (C-222/04, Fondazione Cassa di Risparmio San
Miniato).
Taxes themselves are caught by Article 87(1) EC only when there is a direct
link between the tax revenue and aid measures financed by that revenue
(C-174/02, Streekgewest Westelijk Noord Brabant). This is the case with parafis-
cal charges which are levied on particular products. The revenue collected is
then used for the promotion of those products.
Also it is worth noting that in a number of cases parafiscal charges have
been found to be incompatible with the common market because the charges
themselves were infringing other provisions of the Treaty, such as the prohibi-
tion of discrimination on the basis of national origin (Commission Decision
2000/206 on aid to the Greek Cotton Board; Commission Decision 2000/116
on Dutch ornamental plants). In those cases both the aid and the charges were
prohibited.

III. The Problem with Fiscal Aid

A measure which is found to be state aid may be exempted from the prohibi-
tion of Article 87(1) EC only if it promotes the objectives defined in the vari-
ous categories of exemption, and in particular the conditions laid down in
Article 87(3) EC.
The Community Courts have ruled in numerous cases that aid must be
necessary, proportional and in the Community’s interest. The sole authority
228 phedon nicolaides

which has power to determine the compatibility of aid is the European

Commission. Here “by virtue of Article 87(3) EC, the Commission has a
wide discretion the exercise of which involves complex economic and social
assessments which must be made in a Community context.” (T-348/04, SIDE
v Commission, paragraph 96). Moreover, “it is not for the Community court
to substitute its economic assessment for that made by the institution which
adopted the decision” (C-169/95, Spain v Commission, paragraph 34).
Unless fiscal aid is capped and the granting authority ensures that it remains
below the allowable ceilings, the aid becomes operating aid. This creates two
major problems. First, it is impossible to determine ex ante the amount of aid.
When a firm makes large profits the tax exemption/reduction results in a large
amount of aid. Conversely, when the firm makes no profit the amount of aid
is zero. Since the amount of aid is directly determined by the future profitabil-
ity of the firm, it is impossible to determine its gross grant equivalent at the
moment it is granted. This means that the Commission cannot assess its effects
and proportionality.
Secondly, operating aid is normally granted without any obligation on the
part of the beneficiary to do something it would not otherwise do and which
would be in the general interest.
The Court of First Instance has recently reiterated that “operating aid, that
is to say, aid intended to relieve an undertaking of the expenses which it would
itself normally have had to bear in its day-to-day management or its usual activ-
ities, does not in principle fall within the scope of Article 87(3) EC. The effect
of such aid is in principle to distort competition in the sectors in which it is
granted, whilst nevertheless being incapable, by its very nature, of achieving any
of the objectives of the abovementioned derogations” (T-348/04, SIDE v
Commission, paragraph 99. See also C-301/87, France v Commission, paragraph
50; C-86/89, Italy v Commission, paragraph 18; C-278/95 P, Siemens v Commis-
sion, paragraph 37; and T-459/93, Siemens v Commission, paragraph 48).
Operating aid is not normally allowed because state aid has to be necessary
and have an incentive effect. In the case Side v Commission, the CFI referred
to established case law according to which “Member States are not permitted
to make payments which may improve the situation of the undertakings
receiving the aid but which are not necessary for the attainment of the objec-
tives specified in Article 87(3) EC” (see also C-730/79, Philip Morris v
Commission, paragraph 17).
However, operating aid is exceptionally allowed in three cases: investment
aid for regional development in Article 87(3)(a) EC areas; reduction of envi-
ronmental taxes; and maritime transport.
In the case of regional development, the Commission Guidelines on
Regional State Aid explain that in some instances operating aid may be
 fiscal aid for maritime transport 229

necessary to kick-start the process of development (the Regional Aid Guidelines

can be accessed at the website of DG Competition: http://ec.europa.eu/
comm/competition). However, Member States have to prove that other forms
of aid are not effective and that operating aid can have a direct impact on
regional growth.
In the case of environmental taxes, the rationale for allowing operating aid
is to lessen the damage caused to the international competitiveness of compa-
nies which bear those taxes (see the Commission Guidelines on Environmental
State Aid. They can be accessed at the website of DG Competition: http://
ec.europa.eu/comm/competition). Relief from taxes is a temporary measure
until the polluting companies can adjust by adopting more environmentally
friendly technologies.
In the case of maritime transport, operating aid has a similar rationale as for
the reduction of eco-taxes. It seeks to improve the international competitive-
ness of European shipping and, in addition, to encourage re-flagging of
EU-owned vessels and increase the employment of European seafarers.
As is stated in the current Guidelines on State Aid to Maritime Transport
(OJ C 13, 17/1/2004, p.3), “even though as a matter of principle operating aid
should be exceptional, temporary, and degressive, the Commission estimates
that State aid to the European shipping industry is still justified” (p. 4).

IV. Fiscal aid Measures Permitted by the Maritime

Transport Guidelines

The Guidelines provide for three categories of aid: fiscal aid to shipping com-
panies and seafarers, investment aid and training aid. This chapter focuses
only on fiscal measures.
The Guidelines require, as a general condition concerning all aid granted to
shipping, that:
i. it should not be at the expense of other Member Sates,
ii. it must not distort competition between Member States to an extent con-
trary to the common interest,
iii. it must always be restricted to what is necessary to achieve its purpose,
and
iv. it must be transparent.
However, when later the Guidelines raise the question of fiscal competition
between Member States, they observe that “there is no evidence of schemes
distorting competition in trade between member states to an extent contrary
to the common interest. In fact, there appears to be an increasing degree of
230 phedon nicolaides

convergence in Member States’ approaches to shipping aid.” This suggests

two things.
First, the Commission tends to authorise fiscal aid without requiring
Member States to prove that indeed aid does not cause undue distortion of
competition. Secondly, it authorises schemes which are similar to or duplicate
earlier schemes. As shown by its decision to open a formal investigation (see
scheme C 2/08) in an Irish scheme which is examined in more detail later on,
it believes that fiscal competition is avoided by ensuring uniformity among
the various tonnage tax regimes.
The following types of fiscal aid are mentioned in the Guidelines, without,
however, other types of measures being excluded:
i. Reduced or zero rate of corporate taxation.
ii. Accelerated depreciation on investment in ships.
iii. Non-taxation of profits made on the sale of ships for a number of years.
iv. Tonnage tax.
The inclusion of tonnage tax in the list above may, at first glance, be surprising
because, as explained in the previous section, a tax does not normally confer
an advantage and therefore it is not considered to be state aid. However, spe-
cial types of taxes which are applied only in particular sectors, such as tonnage
tax in shipping, may also be state aid because a fixed amount of tax is paid
irrespective of whether the company concerned makes high or low profits or
even suffers losses. Since tonnage tax may result in lower taxes being paid in
years of high profits, in relation to the standard method of taxation according
to the amount of profits, it must be regarded as a measure which is in principle
capable of providing state aid.2
This assessment of tonnage tax is not unusual. It is in line with the posi-
tion of the Commission concerning special forms of taxation. If they result
in less tax being paid in relation to the normal tax on corporate profits, then
they are presumed to confer state aid. See, for example, Commission Decision

2
The Commission’s practice is elaborated in the following cases: Dutch tonnage tax scheme
(case N 738/1995, approved on 20 March 1 996); German tonnage tax scheme (case N
396/1998, approved on 25 November 1998); UK tonnage tax scheme (case N 790/1999,
approved on 2 August 2000); Spanish tonnage tax scheme (case N 736/2001, approved on 27
February 2002); Danish tonnage tax scheme (case N 563/2001, approved on 12 March 2002);
Finnish tonnage tax scheme (case N 195/2002, approved on 16 October 2002; Irish tonnage
tax scheme (case N 504/2002, approved on 11 December 2002); Belgian tonnage tax scheme
(case N 433/2002, approved on 19 March 2003); French tonnage tax scheme (case N 737/2002,
approved on 13 May 2003); Basque country tonnage tax scheme (case N 572/2002, approved
on 5 February 2003); Italian tonnage tax scheme (case N 114/2004, approved on 20 October
2004); Lithuanian tonnage tax scheme (case N 330/2005, approved on 19 July 2006); Polish
tonnage tax scheme (case N 93/2006, approved on 10 July 2007).
 fiscal aid for maritime transport 231

2003/755 on coordination centres of foreign companies in Belgium,

Com-mission Decision 2003/512 on control centres of foreign companies
in Germany and Commission Decision 2004/76 on logistics centres of for-
eign companies in France. In all three cases, taxes were not derived according
to achieved revenue or profits but according to the number of staff, operat-
ing costs or imputed profits calculated on the basis of a predetermined
formula.

1. Conditions
The Guidelines impose the following conditions:
1. State aid may be granted only to maritime transport, including towing at
sea when more than 50% of towage per year takes place at sea and dredg-
ing when transport of extracted materials to deep sea exceeds 50% of
annual operating time.
2. Account separation is required for non-qualifying activities.
3. Tax relief is primarily for shipowners and mainly for their earnings from
the operation of EU-flagged vessels.
However, it may also apply exceptionally to the entire fleet of an EU-based
shipowner, provided
i. that the fleet is managed in the EU and all vessels satisfy relevant
standards on safe operations and employment conditions,
ii. that EU-flagged vessels are increased or maintained, and
iii. that it contributes to economic activity and employment in the EU.
iv. That the evidence which is normally required to prove the contribu-
tion to EU economic activity and employment includes
v. data on vessels under EU flags,
vi. the number of EU nationals employed on vessels and on-shore activi-
ties, and
vii. The amount of investment in fixed assets.
Tax relief may also be granted to ship management companies providing
both technical and crewing management, which have acquired from ship-
owners full responsibility for the operations of vessels. As in the case of
shipowners with vessels under non-EU flags, ship managers should have
the majority of the vessels they manage under EU flags.
4. With respect to EU seafarers or any other seafarers who pay taxes and
social insurance contributions in the EU, fiscal aid is also allowed for the
purpose of reducing
i. the social insurance contributions of shipowners and seafarers, and
ii. The rates of income tax for seafarers on board EU-flagged vessels.
232 phedon nicolaides

2. Shipownership v Ship Management

The Guidelines and the practice of the Commission reveal that it considers
maritime transport to be divided into three main functions:
i. the commercial management of vessels;
ii. the technical management of vessels (fuelling, catering, insurance, operat-
ing certification, maintenance, etc); and
iii. the management of crews (employment contracts, renewal of crews, etc).
With respect to ship management, the Guidelines stipulate that “ship man-
agement companies may qualify for aid only in respect of vessels for which
they have been assigned the entire crew and technical management”. What
this means in practice is that if a ship management company does not
ensure the commercial management of vessels it must simultaneously ensure
at least the two other functions.
When a vessel is chartered without crew (bare-boat charter), this is gener-
ally considered as being close to operating an owned vessel. Although the
charterer does not have legal title to the vessel he assumes most, if not all,
responsibility for the management of the vessel and/or crew.
A vessel may also be chartered with a crew (time charter). In such situations
the charterer is typically not responsible for all aspects of management. Such
vessels may fall within the tonnage tax system but subject to certain restric-
tions. The issue of management becomes important to determine eligibility for
tonnage tax treatment. In these cases, the Commission considers that, to remain
eligible for tonnage tax, an undertaking need not itself carry out all three func-
tions, but it must carry out at least technical and crewing management.
Therefore, revenue derived from the management of vessels is eligible for
tonnage tax where the ship management company ensures:
i. either both the crew and technical management of the such vessels, or
ii. their commercial management.
However, these two options are open to ship managers only on condition that
the tonnage of such vessels does not exceed four times the tonnage of vessels
for which companies offer together the crew, technical and commercial man-
agement. This rule was elaborated by the Commission in relation to chartered
vessels in its Decision N 563/2001 on the Danish tonnage tax which was
approved on 12 March 2002.

V. Problematic Issues in the Guidelines

Most Member States have adopted measures which provide fiscal incentives to
their shipping industry in line with the Guidelines. However, a number of
 fiscal aid for maritime transport 233

recent cases have highlighted particular problems with the interpretation and
scope of application of some of the requirements of the Guidelines.

1. Ring-Fencing (Preventing Non-Maritime Activities from Deriving

Benefits from Fiscal Aid Granted to Maritime Activities): Case C 5/2007
(ex N 469/2005) (Denmark)
Alleviation of Information Obligations Imposed on Maritime Companies
Danish law exempts Danish maritime companies taxed under the Danish ton-
nage tax from the obligation to provide to the fiscal authorities all necessary
information on their financial transactions with foreign companies belonging
to the same group.
The Danish authorities are of the view that, where one of these companies
is a Danish maritime transport company taxed under the Danish tonnage tax
and where another company is a foreign-based affiliate, the Danish company
has no interest in exporting its benefits to its foreign affiliates by manipulating
transfer prices. Therefore, where one of the affiliated companies is taxed under
the Danish tonnage tax scheme and the other is taxed in another country, the
verification by the Danish fiscal authorities of possible abuses through transfer
prices does not, according to the Danish authorities, serve the interest of the
Danish treasury. This verification would not lead to the recovery of any addi-
tional revenues for the Danish treasury. This is why Denmark proposed to
relieve companies under the Danish tonnage tax from administrative burdens
which they saw as unnecessary from their own perspective. The checks are
considered by the Danish authorities to be in the interest of only other
Member States and of third countries.
The Commission has opened a formal investigation because the Guide-
lines require ring-fencing measures intended to ensure that no activities other
than maritime transport, in the Member State in question, or in any other
Member State or third country, would indirectly benefit from the regime.
All the tonnage tax regimes approved by the Commission in the past five
years provide for ring-fencing measures including verification of transactions
between tonnage tax entities and non-tonnage tax ones.
To that end, the Commission usually requests from Member States a series
of ring- fencing measure such as:
i. the verification of commercial transactions across the ring fence, based on
the arm’s length principle;
ii. rules on the fair sharing of the cost of capital expenditure between eligible
and ineligible activities;
iii. rules on the fair allocation of revenues between eligible and ineligible
activities;
234 phedon nicolaides

iv. the all-or-nothing option for maritime groups (‘all eligible entities of the
group shall opt for the tonnage tax where at least one of them does’).

2. Ineligible Maritime Activities: Cases C 58/2007 (ex N 240/2007)

(Denmark)
Amendments to Tonnage Tax; C 2/08 (ex N 572/07) (Ireland) Modification of
Tonnage Tax
Denmark has proposed amending its already approved tonnage tax regime so
that:
1. profits on the sale of tonnage-taxed vessels be taxed under the tonnage tax
scheme;
2. the gross tonnage of chartered vessels eligible for tonnage tax can be up to
ten times greater than the gross tonnage owned by the shipping company
itself;
3. income from the management of pools of vessels be taxed under the ton-
nage tax scheme;
4. non-tonnage-tax companies be allowed retroactively to enter tonnage tax
as from 2001.
The Commission has accepted the first proposal but expressed reservations
on the remaining three proposals and therefore has opened a formal
investigation.
With respect to eligibility of profits on the sale of tonnage-taxed vessels the
Commission first notes that in its Decision of 19 March 2003 on the Belgian
tonnage tax scheme the Commission accepted that the gains derived from the
disposal of tonnage tax assets could fall under tonnage tax. A similar rule exists
in the UK tonnage tax regime. (Such a rule was however not referred to in the
Commission decision of 2 August 2000 approving the scheme.) According to
the Commission the sale of vessels is a normal activity of shipping. It therefore
accepts that the profits derived from the sale of eligible vessels fall within the
scope of tonnage tax.
With respect to the minimal proportion of owned tonnage to chartered-
in tonnage, the Commission has doubts because in its former decisions it
established a rule whereby the part of the fleet not owned by eligible opera-
tors, exceeding a certain threshold, must be excluded from tonnage tax.
Hitherto, tonnage tax schemes have provided that no less than 20% of the
tonnage of the fleet under tonnage tax should be owned by the beneficiaries.
Otherwise any additional capacities exceeding the threshold of 1:4 (one ton
owned for four tons chartered in on a time or voyage basis) should then
 fiscal aid for maritime transport 235

be taxed under normal corporation tax. Denmark has proposed raising the
ratio to 1:10.
With respect to the inclusion in tonnage tax of management fees derived
from the management of vessels of third parties, the Commission first notes
that its decisions approving tonnage tax schemes did not mention the inclu-
sion of pool fees as eligible revenues for tonnage tax. However, it is willing, for
consistency reasons, to apply to revenues derived from the management of
pools the same rule applicable to revenues derived from activities performed
with time-chartered vessels. This rule, if applied to fees derived from the man-
agement of shipping pools, implies limiting the tonnage tax treatment to
capacities not exceeding four times the tonnage of vessels directly owned
(chartered without crew on a long term).
With respect to the retroactive application of tonnage tax, the Commission
notes that one of the important features of tonnage tax schemes is that mari-
time transport companies have to choose between the normal corporation tax
and a lump-sum tax and that they must be committed to this choice for a
period of at least 10 years, as is the case in all Commission decisions. The
Commission further notes that none of the approved tonnage tax schemes
provided for retroactive entry into tonnage tax and expresses doubts whether
the retroactivity of the entry into tonnage tax and, consequently, the ex post
recalculation of the tax amount to be borne by the companies concerned are
compatible with the common market.
In a similar case involving Ireland (C 2/08), the Commission opened the
formal investigation because Ireland proposed to delete from its tonnage tax
legislation the requirement that not more than 75% of eligible ships could be
chartered in. Under Irish legislation, “chartered in” vessels are provided with a
crew by the charterer. This is in contrast to bare boat chartering, where the
lessee has to man the crew.
In its decision to open the investigation, the Commission repeated that
“even though the guidelines do not mention any limits for the inclusion of
time chartered ships under tonnage tax schemes, in its decision making prac-
tice the Commission has authorised schemes where companies with a ratio of
1:3 or 1:4 owned to time chartered ships were eligible to tonnage tax. The
exception of the 1:4 ratio as compared to the initial 1:3 ratio in Decision No
563/2001/EC concerning the initial approval of the Danish tonnage tax was
justified on the basis of an in depth market analysis.”
According to the market analysis referred to in the earlier decision, Denmark
had chosen a proportion of 1:4 on the basis that its maritime industry had
a long tradition of operating in a more intensive way by means of chartered
ships as compared to those Member States which had notified a lower
236 phedon nicolaides

proportion. For this reason the Commission concluded that there would be
no fiscal competition with other Member States.
On the basis of this reasoning, the Commission decided to open a formal
investigation into the Irish scheme because “Ireland did not provide argu-
ments … that the full abolition of such time charter limits may trigger fiscal
competition between more or less attractive tonnage tax schemes across the
EU. In the light of the guidelines’ acknowledgement that such fiscal competi-
tion needs to be taken into account, the amendments proposed by the Irish
authorities under the present notification to fully remove the time charter
limit may be contrary to the “common interest” expressed in Article 87(3)(c)
of the Treaty on which the approval of tonnage taxes is based.”

3. The Link between Maritime Transport and Other Maritime Activities:

Case C 22/2007 (ex N 43/2007) (Denmark)
Extension to Dredging and Laying Cable Activities of the Exemption of Maritime
Transport Companies from the Payment of Income Tax and Social Contributions
of Seafarers and Case N 93/2006 (Poland) Tonnage Tax in Favour of International
Maritime Transport
The Commission has initiated the formal investigation procedure with respect
to the Danish scheme because it has doubts about the compatibility with the
common market of the extension of the fiscal exemption to cable laying activi-
ties and to certain dredging activities, inasmuch as they may constitute mari-
time transport in the sense of the Guidelines.
According to the Commission, the concept of maritime transport should
be interpreted as covering only the straightforward carriage of goods or
passengers by sea between two ports or between a port and an off-shore instal-
lation, and not services incidental or ancillary to such carriage.
This view conforms to the recent ruling of the Court of Justice in case
C-251/04, Greece v Commission, that transport is the carriage of goods or pas-
sengers by sea. Other services such as towing are incidental or ancillary to the
provision of maritime transport services. Regulations 4055/86 and 3577/92
refine this definition by adding that the carriage of passengers or goods by sea
is “between a port and any other port or off-shore installation.”
Accordingly, the Commission believes that cable-laying activities do not
involve the carriage of passengers or goods or even drums of cable from one
port to another. For the same reason the Commission has doubts with respect
to the dredging of navigational channels. Nonetheless, in this case it accepts
that the transportation of aggregates from a port to a construction site at sea
could constitute maritime transport.
This conclusion, however, appears to be at odds with the provisions of
the Guidelines in section 3.1. The Guidelines state that “fiscal arrangements
 fiscal aid for maritime transport 237

for companies (such as tonnage tax) may be applied to those dredgers whose
activity consists in ‘maritime transport’ – that is, the transport
at deep sea of extracted materials – for more than 50% of their annual
operational time and only in respect of such transport activities.” This
provision suggests that dumping aggregates at sea can qualify as maritime
transport without it being necessary to carry them to an off-shore installation
or another port.
In its decision to launch an investigation into the Polish scheme, the
Commission further elaborated that for both towage and dredging the rele-
vant criterion to measure whether the 50% threshold is attained was the oper-
ational time of each tug or dredger concerned over a fiscal year, and not the
revenue generated. Moreover, this threshold could be calculated only against
activities which strictly correspond to the definition of maritime transport
within EU law.
However, the Commission has clarified that, in line with its past practice
(e.g. decision N 563/2001 on the Danish tonnage tax scheme), it has no
objection to the coverage by the Polish tonnage tax scheme of the following
ancillary activities which are very closely linked with the provision of mari-
time transport services:
1. the leasing and use of containers;
2. loading, unloading and repair activities;
3. the operation of passenger terminals;
4. the sale of goods or services on board passenger ships or passenger-carrying
cargo ships for on-board consumption;
5. the operation of bureaux de change on board passenger ships or passenger
carrying cargo ships, provided that this activity is related to the principal
activity;
6. the transfer of goods or passengers over land or by sea;
7. multimodal transport of cargo or passengers.
Such activities are covered by tonnage tax if they are provided by the tonnage
tax companies themselves.

4. Taxation of Companies v Taxation of Persons: Case N 93/2006 (Poland)

Tonnage Tax in Favour of International Maritime Transport
The Commission has expressed doubts about the compatibility of the Polish
tonnage tax scheme because one of its features is “peculiar”, in that, unlike other
approved tonnage tax schemes, it also covers natural persons liable for personal
income tax. The Commission has stated that it has no experience of tonnage tax
schemes covering natural or legal persons liable for personal income tax. The
wording of the Guidelines indeed explicitly links tonnage tax to corporate tax.
238 phedon nicolaides

5. Location of Companies: Case N 93/2006 (Poland)

Tonnage Tax in Favour of International Maritime Transport
The Commission considers that some provisions of the Polish tax regime
would infringe the right of establishment. In determining whether the strate-
gic management of eligible companies is based in Poland, the Polish authori-
ties will be guided by the physical location of certain key personnel. Apparently
what will be important is the location of headquarters, senior managers and
the location of the board of directors and operational board, which should be
in Poland. In the case of commercial management, the fiscal authorities will
verify that route planning, the taking of bookings for passengers or cargo, the
provisioning of and catering for ships, personnel management and training,
the technical management of ships, including decisions on the repair and
maintenance of vessels take place in Poland. A number of other factors such
as the maintenance of support facilities such as training centres, terminals, etc.
in Poland and the extent to which foreign offices or branches work under the
direction of personnel as well as the fact that a ship is flagged, classed, insured
or financed in Poland may add further weight to the indicators set out
above.
In the Commission’s view, these strict conditions limit the ability of shipping
companies from another Member State to have a secondary establishment
in Poland and to avail themselves of the benefits of the measure. Therefore, the
measure in question may discourage secondary establishment and would to
give rise to problems of de facto discrimination and limit the freedom of
establishment.

6. Deduction of Social Security Contributions from Tonnage Tax Liability:

Case N 93/2006 (Poland)
Tonnage Tax in Favour of International Maritime Transport
The Commission also has serious doubts about the compatibility of the
deductibility of social security contributions and health insurance contribu-
tions from, respectively, the amount and the base of tonnage tax.
As tonnage tax systems are based on notional earnings arrived at on the
basis of the tonnage of the vessels rather than real earnings, the shipowners
who are liable to tonnage tax are not allowed to avail themselves of those
deductions (including depreciation and other tax advantages), which form
part of the general tax system.
The Polish authorities argue that, because any natural or legal person liable
for personal income tax is entitled to such deductions within the Polish general
income tax system, those who are subject to tonnage tax should be entitled
to these deductions too. However, the Commission has doubts regarding
 fiscal aid for maritime transport 239

this reasoning. Tonnage tax regimes are designed to replace rather than com-
plement the normal taxation system for shipowners. For this reason, shipown-
ers subject to corporation tax opting for tonnage tax are no longer entitled
to avail themselves of deductions which would otherwise be available to
any other normally taxed company. According to the Commission, this
logic should also apply if the shipowner is an individual subject to personal
income tax.

8. All-or-Nothing Option for Tonnage Tax for Ten Years:

Case N 93/2006 (Poland)
Tonnage Tax in Favour of International Maritime Transport
The Commission notes that the tonnage tax period, that is the period during
which companies which opt for tonnage tax are obliged to stay within that
scheme, is limited to five years in Poland. The minimal duration of this period
in the other tonnage tax schemes approved so far was ten years. The policy of
the Commission is to require a high level of convergence between approved
tonnage tax regimes so as to avoid inequalities of treatment as between vessels
and shipowners operating under different Member State registers.

VI. Assessment and Conclusions

The Guidelines on State Aid to Maritime Transport aim to reduce the com-
petitive disadvantage of EU-flagged vessels by allowing them to receive tax
treatment similar to that enjoyed by vessels registered under non-EU flags.
The original intention of the Guidelines was to help just shipowners (and
seafarers). But after pressure from a number of Member States, the Commission
agreed to extend the coverage of fiscal aid to ship management. The bounda-
ries between shipowning and ship management are increasingly blurred, and
today’s ship managers exhibit many of the characteristics of shipowners, in
terms of the responsibility they assume for ship operations.
However, the cases reviewed in the previous section reveal that it is not easy
to draw a line between ship managers who act as shipowners and those who
do not. Perhaps such a line is not possible at all. The Commission’s distinc-
tions are to a large degree arbitrary.
For this reason a better approach would be to extend the same fiscal treat-
ment to all income derived from the operation of a vessel. There are at least
two advantages to such a simplified approach. First, there is no evidence to
suggest that full shipowning in the traditional sense makes a more signifi-
cant contribution to the economy and employment in the EU than the
activities of many ship managers each one of whom undertakes only part of
240 phedon nicolaides

the full range of the operations of a vessel. Secondly, a ship manager who
carries out only part of the full range of the operations of a vessel presuma-
bly derives only a partial share of the total revenue from that vessel. This
means that the benefit from fiscal aid will be proportionally less and the
resultant distortion smaller. More importantly, there will be less need for
arbitrary distinctions between eligible and non-eligible shipowning and ship
managing activities.
Lastly, consideration should also be given to the requirement for a link
between eligible fiscal benefits and EU flags. The reason the two are currently
linked is that one of the aims of the Guidelines is to encourage re-flagging
of ships under EU flags. This, however, may unwittingly handicap the devel-
opment of shipowning and ship management activities based in Europe for
the simple reason that it forces shipowners and ship managers to choose
between favourable tax treatment in Europe and possible larger profits and
other benefits from managing non-EU vessels. Although the primary objec-
tive of the Guidelines is to stimulate the re-flagging of ships, another equally
important objective is to safeguard and encourage the growth of maritime
knowledge and skills in Europe. To the extent that European companies would
find it advantageous to own and/or manage non-EU vessels, the current
Guidelines with their link to EU flags may actually undermine their second
objective.

Annex: Examples of Aid for The Employment of Seafarers

N 749/2006 (Sweden): Employment Aid for Shipping

The aim of the notified scheme is to maintain and increase the employment
and training of seafarers who are liable to tax in Sweden and working on board
vessels registered in Sweden used for international transport and goods. The
aid scheme seeks to maintain the number of vessels within the Swedish mari-
time register by reducing operating costs.
It complies with the provisions of the Guidelines because section 3.2 allows
systems by which shipowners are reimbursed (partially or wholly) for the
employment costs instead of applying reduced rates, provided that there is a
clear link to these levies, no element of overcompensation and that the system
is transparent and not open to abuse.
In the case of seafarers working on board vessels (including ro-ro ferries)
providing scheduled passenger services between ports of the Community, that
shipping aid shall be granted only to EC/EEA citizens. This is provided for in
the guidelines.
 fiscal aid for maritime transport 241

N 65/2007 (Estonia): Social Aid for Seafarers

The aim of the measure is to provide social aid for EC seafarers working on
board freight carrying cargo vessels used in international trade, entered in the
Estonian shipping register and flying the Estonian flag.
The measure allows for reimbursement of up to 100% of social taxes paid
on the wages of EC seafarers working on the vessels. The grants are subject to
the annual and overall budgetary limits.
It complies with the provisions of the guidelines because the concept of
Community seafarer is defined according to point 3.2. Hence, since benefici-
ary activities consist exclusively of freight carriage and do not consist of pas-
senger transport, EC seafarers under the present scheme are thus all seafarers
liable to taxation and/or social security contributions in a Member State, as
provided for by the guidelines.
Since the measure provides for the reimbursement of a maximum of 100%
of a seafarer’s income tax as allowed under point 3.2 of the guidelines, and
since any cumulative measure would need to meet that exact same ceiling, the
aid is considered to be in line with points 3.2 and 11 of the guidelines.
Finally, since reimbursement is subject to the verification of tax paid,
monthly crew lists on board, certification of registry of the vessel under the
Estonian shipping register and proof of absence of bankruptcy, the measure
provides a clear link to the levies, ensures the absence of any overcompensa-
tion and prevents the possibility of abuse.

N 311/2005 (Ireland): Refund of Employers’ Social Security Contributions

The aim of the measure is to refund pay-related social insurance (PRSI). The
PRSI scheme pays back social security contributions to employers in respect
of the employment of seafarers on certain ships.
It complies with the guidelines because the refund mechanism will apply
only to those companies which fall within the Irish PRSI net and which
employ qualifying seafarers working on qualifying ships carrying on qualified
activities. The employers will be refunded in respect only of those contribu-
tions for those seafarers certified as qualified by the Mercantile Marine
Office, and they will only be refunded contributions already collected and
paid over to the State. There is therefore a clear link between the levy and the
aid. The refund is provided for by the law, although the ship-operating
company has to apply for the refund; the system is therefore transparent.
The refund is designed to reduce the employers’ social contribution to zero
by refunding contributions already paid and no more; therefore no over-
compensation is possible.
 PUBLIC FINANCING IN THE PORT SECTOR
AND STATE AID RULES

Nikolaos E. Farantouris*

I. Introduction
II. Seaports’ Market Organisation
1. Inter-Port and Intra-Port Competition
2. Member States’ Approach
III. Application of State Aid Rules to Port Financing
1. Transfer of State Resources
2. Economic Advantage
3. Selectivity
4. Effect on Competition and Trade between Member States
IV. The “Market Economy Investor” Principle
1. State Participation in Seaports’ Capital
2. Other Cases of Financial Transfers to Public Enterprises
V. Aid to Seaports Compatible with the Common Market
1. Notification of State Aid
2. Authorisation of State Aid to Seaports
VI. Final Remarks

I. Introduction

Historically, seaports have been seen not only as trade and transport facilitators
but also as centres of regional economic and social development providing
services of general economic interest. Nowadays, maritime ports are becom-
ing increasingly commercial in character and port managers are engaged in
purely commercial activities, such as the provision of port facilities to third
parties and cargo handling. This has resulted in increased inter-port and intra-
port competition and has led to growing concern about the application of EC
competition rules in this economic field. This chapter examines the applica-
tion of state aid rules in the port sector with particular focus on two distinct
aspects of seaport public financing: infrastructure funding and state participa-
tion in ports’ capital. The analysis is based on the provisions of primary EC
law (i.e. Articles 87 and 88 of the EC Treaty) and on non-obligatory acts of
secondary legislation, such as the Commission’s communications on seaports.1

* Ass. Professor, International & European Studies Department, University of Piraeus.

1
Commission Communication, Reinforcing Quality Services in Sea Ports: A key for European
Transport, COM(2001)35 final, 13.2.2001; Commission working document, Public financing
 public financing in the port sector and state aid rules 243

To date, the Commission has failed to enact a port services Directive,2 while
no Guidelines on the application of state aid rules to the port sector have yet
been published.

II. Seaports’ Market Organisation

Before analysing whether the contribution to the financing of infrastructure

or the stakeholding of the State in a port could involve state aid, it is impor-
tant to understand the organisation of the European seaports market in order
to assess the factors of competition and the Commission’s stance in this
sector.

1. Inter-Port and Intra-Port Competition

European ports differ substantially with regard to their physical characteris-
tics, administrative responsibilities and the commercial activities of their man-
aging bodies.3 The different philosophies of port management regarding the
role of the public and private sectors imply a different degree of public involve-
ment in the financing and building of port structures, in the organisation of
the port and in the management of its activities. Roughly speaking, there are
two extreme types of ports within the common market: ports which are oper-
ated entirely on a commercial basis, whether publicly or privately owned; and
ports operated essentially without immediate commercial considerations.
There is a multitude of ports operating on the basis of policies somewhere
between these extremes. But in all cases, the typology of ports is an essential
element of the financing of port infrastructure. Not only is there a wide vari-
ety of ports in Europe but they also cater for different markets. Many have a
captive, regionally limited market or are handling specialised goods destined
for a limited number of users, which are normally within easy reach of the

and charging practices in the Community sea port sector, SEC(2001)234, 14.2.2001; Commission
vademecum, Community rules on state aid and the financing of the construction of seaport infra-
structures, Brussels 15 January 2002; Commission Communication, A European Ports Policy,
COM(2007)616 final, and Commission working document, Accompanying document to the
Communication on A European Ports Policy – Full Impact Assessment, SEC(2007)1339 final,
18.10.2007.
2
Commission Proposal for a Directive of the European Parliament and the Council, Market
Access to Port Services, COM(2004)654, 13.10.2004. On 8 March 2006 the European
Commission formally withdrew the proposal following rejection by the European Parliament
on 18 January 2006. See Hooydonk, E. van., Prospects after the rejection of the European Port
Services Directive [2004] Il Diritto Marittimo, p. 851; idem., The European Port Services
Directive: The good or the last try? [2005] JIML vol. 11, No 3, p. 188–220.
3
See Commission Communication, A European Ports Policy, COM(2007)616 final,
18.10.2007, point 4.
244 nikolaos e. farantouris

port. These ports compete with other ports only to a limited extent. Other
ports supply a wider hinterland. Northwestern continental Europe is served
by ports in Germany, the Netherlands, Belgium and France; ports in these
countries compete with each other. Other hinterlands are served by ports in
very different parts of Europe. Thus, for example, Austria, the Czech Republic,
Hungary and Switzerland are supplied normally through Belgian, Dutch,
German, Italian, French, Polish and Slovenian ports. Ports in these countries
are therefore in competition with each other. Other ports are essentially hub
ports without immediate hinterland. They can be located in the Mediterranean,
or elsewhere as long as they provide feeder links to the rest of Europe. Hence
these ports also compete even if they are a thousand or more miles apart. The
pressure of competition among ports may affect the conditions of competi-
tion at two additional levels: a) among undertakings which operate within the
same port (intra-port competition); and b) among undertakings which oper-
ate in different ports and that may benefit or suffer from the different legal-
administrative systems of the ports in which they are located (inter-port
competition).4

2. Member States’ Approach

The organisation of the European seaports market is influenced not only by
economic geography but also by the fundamentally divergent national port
management philosophies which reflect the different legal status of Member
States’ ports.5 Under EC law, the institutional features and basic port manage-
ment policy remain a matter of choice for individual Member States. The EC
Treaty is neutral as to the choice a Member State may make between public
and private ownership.6 Thus, there are State-administered ports, municipally
administered ports, ports managed by dedicated public bodies (port authori-
ties) and privately managed ports. Even so, the different legal status does not
always explain the different port management philosophies. In fact, formal
similarities can hide substantial differences and vice versa.
In all Member States, the links from port to hinterland (i.e. investments
outside port areas ensuring better connections of the port with the transport

4
Pallis A.A., EU Port Policy Developments: Implications for Port Governance, in Brooks
M.R. & Cullinane K. (eds.), Devolution, Port Governance and Performance, Research in
Transport Economics Series No 17, Elsevier, London 2007, p. 161–176.
5
Generally, Goss, R.O., Economic policies and seaports. The diversity of port policies [1990]
MP&M, vol. 17, No 3, p. 221–234; Haralambides, H.E., Verbeke A., Musso, E. & Benacchio,
M., Port Financing and Pricing in the European Union: Theory, Politics and Reality [2001]
IJME, vol. 3, No 4, p. 323–347.
6
The principle of neutrality in Article 295 EC ensures that the Treaty in no way prejudices
the rules in Member States governing the system of property ownership.
 public financing in the port sector and state aid rules 245

infrastructure network) are the responsibility of central or local governments.

On the other hand, the involvement of the public sector in the financing of
infrastructures within the port area varies greatly from one Member State to
another. As the situation is today, some European ports have full support from
public budgetary resources to invest in public (general) port infrastructures,
i.e. for the planning, financing, construction and maintenance of those infra-
structures. Conversely, other ports, in direct competition with those above, do
not have such support, or at least not on the same terms. The private sector
may also be involved, to different extents, in the organisation and manage-
ment of port services. The different types of port organisations in the EU
allow private companies to own, finance and build port structures in some
cases.7 With a certain degree of simplification,8 two broad groups of Member
States can be distinguished which represent these fundamental differences of
port investment philosophy: a) Member States which finance port infrastruc-
tures through State resources; and b) Member States in which infrastructures
are financed by the ports themselves.
Although there are significant differences among them, broadly speaking,
Belgium, France, Germany,9 Italy and the Netherlands follow the traditional
approach. where most or all general port infrastructure is publicly financed,
through federal, regional or local budgets or a combination of these. In these
Member States, ports are financed as part of the general infrastructure that
supports a country’s industrial and economic base. In a number of cases, a
port is not seen as a separate operating unit which starts at its gates, but rather
as a continuation and extension of a wider integrated economic support sys-
tem.10 The port acts in effect as a government or local community outpost to
channel investment to meet the country’s or region’s needs and priorities.11 In
many cases, the revenues generated from the operation of the port are not
attributed to the managing body of the port, but are channelled directly into
the general public budget. The criteria for planning and adopting investment

7
E.g. private companies owning the port are a feature of the UK system, where privatisa-
tion of a considerable number of ports was carried out mainly in the 1980s, although some
other privately owned ports exist elsewhere.
8
As the Commission notes, even when a Member State tends to fall within one of the two
broad groups described below, ports within that Member State may also exhibit fundamental
differences in port investment philosophy; Commission Communication, Reinforcing Quality
Services in Sea Ports: A key for European Transport, COM(2001)35 final, 13.2.2001.
9
With the exemption of Mecklenburg-Vorpommern ports.
10
I.e. the port exists to serve the community in which it is located.
11
Cf., e.g., in the Netherlands, Commission Decisions in case N 577/1999 (subsidies for
terminals in the Port of Rotterdam), C 59/1998 (subsidies to support barge control in ports),
N 60/2006 (public financing of infrastructure and stake holding in the Port of Rotterdam); see
below.
246 nikolaos e. farantouris

decisions vary from one Member State to another. Some ports fix a minimum
capital return on investment requirements and assess different investment
possibilities before normally choosing those promising the best return. Other
ports do not carry out such an assessment: ports are seen as part of the “public
domain”, and as such they are not always expected to follow commercial
considerations.
As a rule, the State generally does not provide funding for the financing of
general port infrastructure in Denmark, Finland, Ireland, Portugal, Spain,
Sweden and the United Kingdom. Ports in this group, irrespective of their
legal status, are structured essentially as separate and fully commercial enti-
ties. They have to finance all port infrastructure investments from their rev-
enues, which include port dues, or otherwise have to have recourse to the
financial markets. This policy has been introduced in Greece. In these coun-
tries, the managing bodies of the ports12 are autonomous bodies within the
State Administration, public undertakings under company law or privately
owned companies. Investment decisions are adopted according to sources of
income and financing available to the managing body of the port. These
normally include charges, dues and revenues related to ports’ operations,13
real property transactions, including sales of land and non-port-specific
developments like housing, borrowing14 and, in the case of regionally assisted
areas, regional funds and capital grants. In all cases there is normally accounts
separation.
In recent years a clear trend has been observed away from the traditional
state financing approach, which has been abandoned in a number of Member
States in favour of the port financing approach. However, fundamental
national considerations make it unlikely in the immediate future for either of
the two basic national approaches to the financing of general infrastructures
in ports to be changed throughout the Community in favour of the other.
Certainly, this divergence may well affect the competitive conditions between

12
The use of the term “Port Authority” may be particularly confusing, because it is often
applied to completely different situations. The term “managing body of the port” includes any
private or public body which is responsible for a certain port area (cf. the definition provided
in the Commission’s proposal for a Directive of the European Parliament and Council on mar-
ket access to Port services); see below.
13
In general, three types of payment can be distinguished in ports – those related to the
provision of services and facilities to enable a ship safely to enter and use the port; payments for
specific services or supplies rendered; and rents or charges for the use of land or equipment
owned by the port.
14
Although some ports have access to the financial market through the public sector (i.e.
loans at preferential rates), most ports in this group have to negotiate loans at commercial rates;
Commission vademecum, op. cit., point 33.
 public financing in the port sector and state aid rules 247

ports,15 setting the question to what degree the existing State aid rules of the
EC Treaty apply despite differences in port management philosophies.

III. Application of State Aid Rules to Port Financing

The basic rules of EC State aid policy are outlined in Title VI, Articles 87–88
of the Treaty. These rules have been amplified over the years by secondary
legislation and Court rulings. The point of departure is laid down in Article
87(1) of the Treaty. This Article provides: “Save as otherwise provided in this
Treaty, any aid granted by a Member State or through State resources in any
form whatsoever which distorts or threatens to distort competition by favour-
ing certain undertakings or the production of certain goods shall, insofar as it
affects trade between Member States, be incompatible with the common
market”. However, the provisions of the Treaty do not imply that all types of
public funding of port infrastructures fall under the notion of State aid caught
by Article 87(1). EC State aid rules apply only to measures which satisfy
cumulatively the criteria listed in Article 87(1), which are:

1. Transfer of State Resources

State aid rules cover only measures involving a transfer of State resources
(including those of national, regional or local authorities, public banks and
foundations, etc.). Furthermore, the financial support does not necessarily
need to be granted by the State itself. Article 87(1) may also cover a grant by
a private or public intermediate body appointed by the State. This could apply
in cases where an autonomous body, irrespective of its legal status, is given the
responsibility of managing state funds. Financial transfers which constitute
aid can take many forms: not just grants or fund allocations, but also fiscal
rebates, loan guarantees, accelerated depreciation allowances, capital injec-
tions etc. The issue of determining whether State aid is involved in port financ-
ing is of particular relevance for Member States which finance port
infrastructures through public funds.16 As noted above, the ports concerned
can be found mainly in Member States where most or all general port infra-
structure is publicly financed through federal, regional or local budgets (e.g.
Belgium, France, Germany, Italy and the Netherlands).

15
Huybrechts, M. & Meersman, N., Port Competitiveness – An economic and legal analysis
of the factors determining the competitiveness of seaports, Brussels 2001, p. 11 et seq.
16
Public investment in port projects represents between 5 and 10% of all Community
transport infrastructure investments; see Commission working document, Public Financing
and Charging Practices in the Community Sea Port Sector, SEC(2001)234.
248 nikolaos e. farantouris

By contrast, seaports in Member States where infrastructures are financed

by the ports themselves as separate and fully commercial entities (e.g.
Denmark, Finland, Ireland, Portugal, Spain, the United Kingdom and Greece)
do not normally receive public financing for their infrastructures.17 In those
Member States, the issue of State aid is generally less often at stake. Nevertheless,
certain specific port infrastructure projects financed through State resources
may involve State aid to which the Treaty’s rules apply.

2. Economic Advantage
The second constituent part of a State aid measure is whether or not a publicly
financed activity affects the normal course of business by distorting, or threat-
ening to distort, market competition. Under Article 87 EC, the aid should
constitute an economic advantage which the undertaking would not have
received in the normal course of business. It should be stressed in this regard
that “any entity engaged in economic activities of a commercial nature” is
considered to be an undertaking under Community competition law.18 The
status of the beneficiary is not relevant in this context (even a non-profit-
making organisation can engage in economic activities).19 The economic
advantage referred to above is not limited just to grants or fund allocations.
State aid may be involved in cases where, e.g., an undertaking buys/rents pub-
licly owned land at an advantageous price or enjoys privileged access to infra-
structure without paying a fee.
However, a distinction must be drawn between a situation where the State
acts in the exercise of official authority and that where it carries out economic
activities of an industrial or commercial nature by offering goods or services
on a market.20 For instance, the financing of the construction of port infra-
structures necessary for and directly related to the exercise of public authority
functions21 such as, inter alia, health, maritime and port safety, environmental

17
Exception is made of the port infrastructures financed through the EU Structural Funds
and the Trans-European Transport Network projects (TEN-T).
18
See Case C-179/90 Merci convenzionali Porto di Genova SpA v Siderurgica Gabrielli SpA
[1991] ECR I-5889. Thus, a port authority engaged in the management and provision of port
facilities and commercial services is an undertaking within the meaning of EC competition law.
Cf. Case T-128/98 Aéroport de Paris v Commission [2000] ECR II-3929; Case C-82/01
P Aéroport de Paris v Commission [2002] ECR I-9297.
19
For instance, in its Decision of 16 September 1997 (Gemeinnützige Abfallverwertung), OJ
L 159, p. 58, point V, the Commission stated that the fact that the beneficiary of an aid is not
profit-seeking is not relevant to assessing the effects of the aid on trade and competition as long
as that beneficiary is competing on the market with profit-seeking operators.
20
Case C-343/95 Cali & Figli – Port di Genova [1997] ECR I-1547.
21
See Article 3 in conjunction with Article 5 of the Commission Proposal for a Directive of
the European Parliament and the Council, Market Access to Port Services, COM(2004)654,
13.10.2004.
 public financing in the port sector and state aid rules 249

protection, security, customs or immigration services, do not normally involve

State aid. By contrast, the public financing of the construction of port infra-
structures required for the provision of port services always, by the very nature
of those infrastructures, confers an economic advantage. In that connection,
it is of no importance that the State is acting directly through a body forming
part of the State administration or by way of a body on which it has conferred
special or exclusive rights. In order to make the distinction between the two
situations referred to above, it is necessary to consider the nature of the activi-
ties carried on by the public undertaking or body on which the State has
conferred special or exclusive rights.22
The legal systems governing ports vary considerably from one Member
State to another. As explained above, a port in the EU can be managed by the
State itself (i.e. by national, regional or local authorities), by the intermediary
of a public undertaking or body or by a private operator. Taking into account
the differences in port management systems across the EU, the Commission
has defined the concept of “managing body of a port” as follows: “Managing
body of the port or port authority (hereafter referred to as “managing body of
the port”) means a body which, whether or not in conjunction with other
activities, has as its objective under national law or regulations the administra-
tion and management of the port infrastructures, and the co-ordination and,
where appropriate, the control of the activities of the operators present in the
port or port system concerned. It may consist of several separate bodies or be
responsible for more than one port”.23 As the Court has noted, the managing
bodies of ports in the EU often carry out cumulatively two activities of a dif-
ferent nature: (a) activities required for the exercise of their function as a pub-
lic authority; and (b) economic activities which go beyond public authority
functions and involve the offering of goods or services on a market. In certain
cases, the managing body of a port can be entrusted by law with the operation
of certain economic activities falling within the category of “services of general
economic interest” in a given seaport.
The competition rules do not apply to matters which are intrinsically pre-
rogatives of public authority functions. In the case of seaports, this is normally
the case for administrative and supervisory activities linked to the administra-
tion and management of the port infrastructures. The Court of Justice has
found24 that administrative activities, in particular supervisory activities,

22
Cf. Case 118/85 Commission v Italy [1987] ECR 2599, paras. 7 and 8.
23
Article 3 (definitions) of the Commission Proposal, op. cit, COM(2004)654, 13.10.2004.
24
See Case T-128/98 Aéroport de Paris v Commission [2000] ECR II-3929, paras. 75 et seq.,
and 117, where the Court drew a distinction between “the occupation of land, buildings and
facilities within the airport perimeter, in return for which ground-handlers pay a State fee, and the
airport management services […] for which ground-handlers pay a commercial fee”. Also, Case
C-82/01 P Aéroport de Paris v Commission [2002] ECR I-9297.
250 nikolaos e. farantouris

represent public authority functions, which do not fall within the scope of the
Treaty. Other port authority services, such as port police and customs facili-
ties, are also excluded. The Court has clarified, for example, that an organism
controlling and supervising air space and collecting charges for the use of its
air navigation system,25 or a private law body carrying out anti-pollution sur-
veillance in a sea port,26 exercises powers which are typically those of a public
authority and which are not of an economic nature. Therefore, public funding
for investments made in port infrastructure which is indispensable for the
exercise of these functions does not normally constitute state aid.
By contrast, the competition rules fully apply to the economic activities of a
managing body of a port, irrespective of the fact that it may, at the same time,
carry out public authority functions.27 In other words, the provision of com-
mercial services by the managing body of the port directly to a port user rep-
resents a commercial activity to which the Treaty’s state aid rules apply. The
managing body of a port may be involved in the management and operation
of the port without itself providing a service to a user but by facilitating such
service being provided by a different, independent enterprise.28 The managing
body may, e.g., provide premises for joint use by users and suppliers and estab-
lish procedures and conditions under which independent suppliers carry out
their businesses.29 This type of activity, for which the managing body of the
port would normally receive retribution goes beyond the functions of the
managing body’s role as a public authority, as it involves the offering of goods
and services in the market. Such activities are commercial activities to which
the competition rules of the Treaty apply. However, some port infrastructures
may be necessary for the provision of so-called “services of general economic
interest”.30 Port services which, according to public law, have to be provided
by a given undertaking in view of the needs of all seaport users and/or of the
community as a whole, may under certain circumstances constitute such serv-
ices. They normally constitute an economic activity for the undertaking in
question, even if this activity is subjected to a number of public service require-
ments. Member States have in fact a certain margin of discretion to declare

25
Case C-364/92 SAT Fluggesellschaft v Eurocontrol [1994] ECR I-43.
26
Case C-343/95 Diego Calí & Figli Srl v Servizi ecologici porto di Genova SpA [1997] ECR
I-1547.
27
According to the Court, any activity consisting in offering goods or services on a given
market constitutes an economic activity. Cf. C-35/96 Commission v Italy [1998] ECR I-3851;
Cases C-180/98 to C-184/98 Pavlov et al. v Stichting Pensioenfonds Medische Specialisten [2000]
ECR I-6451.
28
Case C-82/01 P Aéroport de Paris, v Commission [2002] ECR I-9297: the provision of
infrastructure facilities to third parties against remuneration constitutes an economic activity.
29
See Case T-128/98 Aéroport de Paris v Commission [2000] ECR II-3929, para. 120.
30
Article 86(2) EC.
 public financing in the port sector and state aid rules 251

port services as falling under the category of public service and to entrust an
undertaking with the provision of such a service. EU law leaves it up to the
Member States to decide whether they provide public services themselves, or
whether they entrust their provision to a third party under specific condi-
tions.31 However, when an undertaking, be it a private company or a public
body, can be considered to be entrusted with the operation of services of gen-
eral economic interest in the sense of Art. 86(2) EC, the relevant rules of the
Treaty, and in particular the competition rules, nevertheless have to be
respected insofar as the application of such rules does not obstruct the per-
formance of those services. In particular, the arrangements made by the public
authorities have to respect the three basic principles which underlie the appli-
cation of Article 86 of the Treaty.32 These are neutrality, definition of the public
service mission and proportionality. These principles are aimed at ensuring equal
treatment and fair competition between (public and private) operators. They
guarantee that those services are managed under the economically most
favourable conditions available on the market. They also allow for a flexible
and context-sensitive balance which takes account of the Member States’ dif-
ferent circumstances and objectives.

3. Selectivity
To constitute State aid, it is not enough that the funds are public and confer
an economic advantage. As a third constituent, the measure has to be selective
and thus affect the balance between the recipient undertaking(s) and its com-
petitors.33 Selectivity is what differentiates State aid from so-called “general
measures”. Those are measures which apply without distinction across the
board to all undertakings in all economic sectors of a Member State (e.g.
nation-wide fiscal measures). As long as they do not favour certain undertak-
ings or the production of certain goods only, such general measures are an
exercise of the Member State’s power to choose the economic policy it consid-
ers most appropriate, and do not constitute State aid for the purposes of

31
White Paper, Services of General Interest, COM(2004)374 final, 12.5.2004; Commission
Communication, Services of General Interest, including social services of general interest: A new
European commitment, COM(2007)725 final, 20.11.2007.
32
See Commission Decision of 28 November 2005, The application of Article 86(2) of the
EC Treaty to state aid in the form of public service compensation granted to certain undertakings
entrusted with the operation of services of general economic interest, OJ L 312, 2911.2005, p. 67.
33
As noted above, where the managing body of a port is engaged in economic activities
beyond its public authority functions, it is considered an undertaking in respect of those activi-
ties and as such a potential beneficiary of state aid. Inter alia, Case T-128/98 Aéroport de Paris
v Commission [2000] ECR II-3929, and Case C-82/01 P Aéroport de Paris v Commission [2002]
ECR I-9297.
252 nikolaos e. farantouris

Article 87(1).34 In contrast, an aid measure is considered to be selective if the

authorities apply it in a discretionary manner. The selectivity criterion is also
satisfied if the aid measure in question applies only to part of the territory of
a Member State (this is the case for all regional and sectoral aid schemes).
The selectivity criterion is a benchmark for deciding whether a concrete
investment measure – no matter whether it is categorised as port infrastruc-
ture, superstructure, mobile asset or operational service – constitutes an aid or
not. As regards infrastructure, in particular, a distinction has to be drawn
between, on the one hand, the general economic advantage which port under-
takings, exporters, importers, logistic operators, the port community and the
country of location of the port may benefit from and which arises from the
mere existence of a port. And, on the other, the measurable economic advantage
which an undertaking, including the managing bodies of the ports, may ben-
efit from when carrying out an economic activity and which by its very nature
may alter the balance between an undertaking or group of undertakings and
its/their competitors.35 Similarly, public funding of the management of exist-
ing infrastructure and, in particular, financial advantages deriving from such
funding for the managing body of the port may well constitute a state aid.36
The Commission has linked the possible presence of state aid to the categori-
zation of infrastructures to public (general) and user-specific.37

a) Public (general) infrastructure is open to all users on a non-discriminatory

basis. It includes maritime access and maintenance (e.g. dikes, breakwaters,
locks and other high water protection measures; navigable channels, includ-
ing dredging and ice-breaking navigation aids, lights, buoys, beacons; float-
ing pontoon ramps in tidal areas); public land transport facilities within the
port area, short connecting links to the national transport networks or TENs;

34
Cf., although not in the port sector, Commission Decision of 13 February 2002 in case
N 812/2001 (aid for sludge treatment), OJ C 248/2002, 15.10.2002.
35
Cf. Commission Green Paper, Sea Ports and Maritime Infrastructure, COM(97)678 final,
10.12.1997; Commission Communication, Reinforcing Quality Services in Sea Ports: A key for
European Transport, COM(2001)35 final, 1.2.2001, p. 11; Commission vademecum, op. cit,
points 2 and 49.
36
Similarly, in the case of an internationally active airport, the Commission considered that
a reduction of corporate tax was covered by Article 87(1); see Commission Decision of 3 July
2001 in case E 45/2000 (Fiscal exemption in favour of Schipol Group – Amsterdam Airport), OJ
C 37, 11.2.2004.
37
Commission Communication, Reinforcing Quality Service in Sea Ports etc, op. cit., point
3.3. See also Commission Decision of 20 October 2004 in case N 520/2003 (financial support
for infrastructure works in Flemish Ports), OJ C 176, 16.7.2005, and Commission Decision of
24 April 2007 in case N 60/2006 (public financing of infrastructure and stakeholding in the
Port of Rotterdam), OJ C 196, 24.8.2007, where the Commission confirmed its approach to
which kind of port infrastructure raises State aid issues and which not.
 public financing in the port sector and state aid rules 253

and infrastructure for utilities up to the terminal site. Investments in such

infrastructure are normally considered by the Commission as general
measures, being expenditure incurred by the state in the framework of its
responsibilities for planning and developing a transport system in the inter-
ests of the general public provided the infrastructure is de jure and de facto
open to all users, actual or potential, in accordance with Community legisla-
tion. However, examination of the particular conditions attached to a given
case of financing of public (general) infrastructures may reveal that the invest-
ment in question provides an advantage to a particular undertaking or group
of undertakings in respect of their competitors. In that case, the financing
could involve state aid and should have to be examined according to Articles
87 and 88 of the Treaty, despite its prima facie appearance as public infra-
structure. Furthermore, the examination of the particular conditions attached
to a given case of financing of public (general) infrastructures may reveal that
the managing body of the port pursues activities which go beyond purely
administrative and supervisory activities and obtain from the public invest-
ment in question an economic advantage which would not be obtained in the
normal course of business.38 In that case, the financing could also involve
state aid and should have to be examined according to Articles 87 and 88 of
the Treaty.

b) User-specific infrastructures include all those infrastructures designed for a

particular user or category of users of the port. Port superstructures and some
port infrastructures such as yards, jetties, pipes and cables for utilities on the
terminal sites of a port often fall under this category. This is also the case of
works which make the terminal site “ripe for construction” including, inter
alia, the filling of harbour basins, rough levelling and, where necessary, the
demolition of existing buildings and structures. Infrastructures which are not
open to all users on a non-discriminatory basis, but are dedicated to one or
more specific users, fall into the category of user-specific infrastructures.39 In
view of the growing sensitivity of competition among EU seaports, the
Commission considers that any public funding of user-specific port infra-
structures in ports open to international traffic is likely to involve State aid.
Public support to investments in user-specific infrastructures (including inter
alia mobile assets and operational services) generally favours certain undertak-
ings, and it is difficult to imagine a situation where this is not the case. This

38
Cf. Case T-128/98 Aéroport de Paris v Commission [2000] ECR II-3929, and Case C-82/01
P Aéroport de Paris v Commission [2002] ECR I-9297.
39
Commission Communication, Reinforcing Quality Service in Sea Ports etc, op. cit.,
point 3.3.
254 nikolaos e. farantouris

consideration also applies where the publicly financed assets are dedicated to
the business activities of the managing body of the port itself. As referred to
above, public and private undertakings often compete in the provision of the
same or similar port services within the same port or in ports located within
the same economic region. Any aid granted to a provider of port services is
deemed, by its nature, to affect trade between Member States. Consequently,
the Commission presumes the existence of State aid in any measure aimed to
finance user-specific port structures.40 However, this presumption does not
exclude the possibility that a Member State may finance user-specific port
infrastructures in circumstances which would be acceptable to an investor
operating under normal market economy conditions.41 Furthermore, the
existence of State aid does not preclude the financing measure in question
being considered as compatible with the common market in line with one of
the exemption clauses laid down in paragraphs (2) and (3) of Article 87 of the
Treaty.
In sum, a number of factors, such as the factual situation, potential and/or
concrete beneficiaries, size and measurements of the installations and their
actual and/or potential users, will play a key role in any assessment by the
Commission and the Court.

4. Effect on Competition and Trade between Member States

Finally, in order to involve State aid within the meaning of Article 87(1),
publicly financed port infrastructures must distort competition and trade
between Member States. Aid may have a potential effect on competition and
trade between Member States. It is normally considered sufficient if it can be
shown that the beneficiary is involved in an economic activity and that he
operates in a market in which there is trade between Member States.
Therefore, investment aid to regional or local ports handling goods or serv-
ices in which there is no cross-border maritime trade in the Community (i.e.
intended only for local or regional markets) may fall outside the scope of
Article 87.42

40
Cf. White Paper, Fair payment for Infrastructure Use: A phased approach to a common trans-
port infrastructure charging framework in the EU, COM(1998)466 final, 22.7.1998, Ch. 5,
paras. 42–43.
41
On the “market economy investor” principle, see infra, under IV.
42
Inter alia, Case C-5/2001 Belgium v Commission [2002] ECR I-11991; Case T-269/99 to
T-271/99 Territorio Historico de Guipzcoa - Diputacin Foral de Guipzcoa etc. v Commission
[2002] ECR II-4214; CaseT-288/99 Regione Autonoma Friuli-enezia-Giulia v Commission
[2003] ECR II-3683.
 public financing in the port sector and state aid rules 255

IV. The “Market Economy Investor” Principle

The managing bodies of the port involved in business activities may, in spite
of the nature of their relationship with public authorities, compete in the
market under conditions and terms similar to those applying to private
undertakings. To ensure respect for the principle of neutrality between public
and private companies, the Commission’s consistent practice in all industrial
and services sectors open to competition has been to apply the so-called “mar-
ket economy investor principle”.43 This principle is used to assess the existence
of State aid both in cases of public funding of port user-specific infrastructures
and in cases of state participation to seaports’ capital.

1. State Participation in Seaports’ Capital

The market economy investor principle implies that the aid must be assessed
as the difference between the terms on which the funds were made available
by the State to the public enterprise, and the terms which a private investor
would find acceptable in providing funds to a comparable private undertaking
when the private investor is operating under normal market economy condi-
tions. Unless the more favourable provision of public funds is treated as aid
and evaluated with respect to one of the exemptions of the Treaty, the princi-
ple of neutrality of treatment between public and private undertakings is
infringed.
The principle of using an investor, operating under normal market condi-
tions, as a benchmark both to determine whether aid is involved and, if so, to
quantify it, was first adopted by the Council and the Commission in the steel
and shipbuilding sectors. The Commission has since applied this principle in
numerous individual cases, most recently in the Port of Rotterdam case.44 The
principle has also been accepted by the Court as a yardstick for the determina-
tion of whether aid was involved.45 According to the case law, investment by

43
Generally, Slocock, B., The market economy investor principle [2002] Competition Policy
Newslettter 2, p. 23; Parish, M., On the private investor principle [2003] ELRev 2003, p. 70.
See also Commission Communication on the application of Article 92 and 93 [now 87 and 88]
of the Treaty to public shareholdings, Bull. EC No 9-1984; Application of Articles 92 and 93
[now 87 and 88] of the EC Treaty and Article 61 of the EEA Agreement to State aid in the avia-
tion sector, OJ C 350, 10.12.1994.
44
Commission Decision of 24 April 2007 in case N 60/2006 (public financing of infra-
structure and stake holding in the Port of Rotterdam) OJ C 196, 24.8.2007.
45
Cf. Case C-482/99 France v Commission (Stardust) [2002] ECR I-4397. See also the
Opinion of Advocate-General Geelhoed in Joined Cases C-328/99 and C-399/00 Italian
Republic and Sim 2 Multimedia SpA v Commission [2003] ECR I-4035.
256 nikolaos e. farantouris

the public authorities in the capital of undertakings, in whatever form, may

constitute State aid where the conditions set out in Article 87 are fulfilled.46
However, State aid is not involved where the new capital is contributed in
conditions which would be acceptable for a private investor operating under
the normal conditions of a market economy.47 In order to determine whether
such contribution is in the nature of State aid, it is necessary to consider
whether in similar circumstances a private investor of a size comparable to
that of the bodies administering the public sector might have provided capital
of such an amount.48 In the Court’s view, although the conduct of a private
investor need not be the conduct of an ordinary investor laying out capital
with a view to realizing a profit in the relatively short term, it must at least be
the conduct of a private holding company or a private group of undertakings
pursuing a structural policy–whether general or sectoral–and guided by pros-
pects of profitability in the longer term.49
Accordingly, in cases of state participation in seaports, it is crucial to exam-
ine whether the decision to take shares is motivated by prospects of profitabil-
ity and return of investment. To determine whether the decision to finance the
infrastructure was driven by the prospect of profitability in the long term, the
Commission has to consider the financial assessment of the project because,
from the perspective of a private investor, the maximization of profits over a
pre-defined time horizon and the financial viability of the project are the main
objectives. The Port of Rotterdam case is a characteristic example of the applica-
tion of the market investor principle to the port sector.50 The case concerned
state participation (capital injection) in the port operator (the Port Authority
Rotterdam), a public authorities’ holding the shares in which were held by the
municipality of Rotterdam. The Commission invoked its Guidelines on the
application of Articles 87 and 88 EC to public authorities’ holdings51 and in
particular paragraph 3 of the Guidelines which stipulates the following:
“Straightforward partial or total acquisition of a holding in the capital of an
existing company, without any injection of fresh capital, does not constitute

46
Cases T-228/99 & T-233/99 Westdeutsche Landesbank Girozentrale and Land Nordrhein-
Westfalen v Commission [2003] ECR II-435; C-305/89 Italy v Commission [1999] ECR I-1603,
para. 18.
47
Cases 296/82 & 318/82, Netherlands and Leeuwarder Papierwarenfabriek Bv v Commission
[1985] ECR 809, para. 17.
48
Ibid., paras 19–20.
49
See Abbamonte, G.B., Market economy investor principle: a legal analysis of an economic
problem, [1996] ECLR, p. 258; Slocock, B., The market economy investor principle, [2002]
Competition Policy Newsletter, v. 2, p. 23.
50
Commission Decision of 24 April 2007 in case N 60/2006, OJ C 196, 24.8.2007.
51
Commission Communication on the application of Article 92 and 93 [now 87 and 88]
of the Treaty to public shareholdings, Bull. EC 9-1984.
 public financing in the port sector and state aid rules 257

aid to the company. Nor is State aid involved where fresh capital is contributed
in circumstances that would be acceptable to a private investor operating
under normal market economy conditions. This can be taken to apply: …
where fresh capital is injected into a public enterprise, provided this fresh capi-
tal corresponds to new investment needs and to costs directly linked to them,
that the industry in which the enterprise operates does not suffer from struc-
tural overcapacity in the common market, and that the enterprise’s financial
position is sound.” On this basis, the Commission came to the conclusion that
the decision of the State to purchase shares in the Port Authority Rotterdam
was supported by prospects of profitability, and the return of the investment
was evaluated on the basis of the long-term prospects of profitability. As the
fresh capital corresponded to new investment needs and to costs directly linked
to them and the financial position of the Port was sound (i.e. not in diffi-
culty,52) the public contribution would be contributed in circumstances
acceptable to a private investor operating under normal market conditions.

2. Other Cases of Financial Transfers to Public Enterprises

The Commission applies the market investor principle in the assessment of all
kinds of state participation, such as Government capital injections, state guar-
antees and other financial transfers from state sources to public enterprises,
and whenever the managing body of the port is involved in “economic activi-
ties of a commercial nature”.53 There is normally a presumption of unlawful
State aid in favour of publicly owned or controlled companies in public ports
where there is not account separation (i.e. cases of non application of the
Transparency Directive,54) because it is then impossible to distinguish between
economic and public authority functions.55
The market investor principle would normally permit one to ascertain,
depending on the particular circumstances of a given case: (a) whether the
state funds made available to the managing body of the port involve State aid;

52
Cf. Commission Guidelines on rescue and restructuring firms in difficulty, OJ C 244/2,
1.10.2004, points 9–10.
53
As noted above, the Court has ruled that the competition rules fully apply in such cases to
public autonomous bodies, irrespective of their legal status. See Case C-343/95 Cali & Figli –
Port di Genova [1997] ECR I-1547; Case T-128/98 Aéroport de Paris v Commission [2000] ECR
II-3929; Case C-82/01 P Aéroport de Paris v Commission [2002] ECR I-9297.
54
Commission Directive 80/723/EEC, as amended by Directive 2000/52, OJ L 193,
29.7.2000, p. 75. For the purposes of the Transparency Directive, “public undertakings” means
any undertaking over which the public authorities may exercise directly or indirectly a domi-
nant influence by virtue of their ownership of it, their financial participation therein, or the
rules which govern it.
55
Commission Communication, Reinforcing Quality Services in Sea Ports: A key for European
Transport, COM(2001)35 final, 13.2.2000, point 3.2.
258 nikolaos e. farantouris

and/or (b) whether the behaviour of the management body of the port
corresponds to that of a private market investor when it comes to examining
possible aid in the dealings between that managing body and third parties.
The minimum requirements for considering that the market economy in-
vestor principle has been applied by the managing body of the port are:
i) the existence of strategic port development plans; ii) the existence of an
adequate selection procedure ensuring the selection of the best economic offer
by the managing body of the port; and iii) the objective of attaining an ade-
quate return on investments over a reasonable period of time.56
Even then, there will not always be certainty that the market economy
investor-test has been complied with and that, therefore, a particular transac-
tion by a government authority does not constitute State aid. This approval
can be obtained only by notifying the transaction concerned to the competent
authorities under the state aid rules. Even if the Commission decides in a
certain way, in principle the European Court of Justice has the final say on
whether a measure constitutes State aid in the sense of Article 87(1) EC.

V. Aid to Seaports Compatible with the Common Market

In any case where it is apparent that a public financing measure involves State
aid under Article 87 EC, the measure has first to be examined by the
Commission in order to determine whether or not it can be found compatible
with the Common Market. The same applies to plans to make financial trans-
fers from public funds to ports or port companies in circumstances in which
financial transfers may involve aid.

1. Notification of State Aid

The Treaty establishes the obligation of the Member States to notify to the
Commission any plan to grant State aid before putting such a plan into
effect.57 It is the responsibility of the Commission to examine notifications
and to decide whether the proposed aid is compatible with the Common
market and can be authorised, or whether the “State concerned shall abolish
or alter such aid.”58 Council Regulation 659/9959 as implemented by

56
Case T-613/97 Union française de l’Express (Ufex) et al. v Commission [2000] ECR II-4055,
para. 75: the “market investor principle” allows for decisions which may be seen as part of the
logic of a market investor which is pursuing a structural, global or sectoral policy, guided by the
long-term outlook. See Commission vademecum, op. cit., point 66.
57
Article 88(3) of the EC Treaty.
58
Article 88(2) of the EC Treaty.
59
Cf. Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules
for the application of Article 93 of the EC Treaty, OJ L 83/1, 27.3.1999, p. 83.
 public financing in the port sector and state aid rules 259

Regulation 794/200460 lays down detailed rules for the application of Article
88 of the Treaty.61 According to the Regulation, Member States may not put
into effect any new aid before the Commission has taken, or is deemed to
have taken, a decision authorising such aid. Aid granted before authorisation
is illegal. Any aid put into effect in contravention of such clause may have to
be recovered from the beneficiaries which improperly received it, if it is
deemed by the Commission to be incompatible with the EC common
market.

2. Authorisation of State Aid to Seaports

The measure in question can be authorised if it fulfils the exemption condi-
tions listed in Article 87(2) and (3) of the Treaty. Article 87(3)(a) covers aid to
promote the economic development of areas where the standard of living is
abnormally low or where there is serious underemployment. Article 87(3)(c)
refers to aid to facilitate the development of certain economic activities or
certain economic areas. These two exemptions are of particular relevance in
the context of regional aid (including Structural Funds operations)62 and aid
to sensitive sectors.63
In view of the risk of affecting trade between Member States by state
aid flows to ports, the Commission’s consistent practice has been to interpret
the exemption rules of the Treaty strictly. Thus, aid in support of commercial
services is likely to constitute operating aid caught by the general interdiction
of Article 87(1) which cannot be deemed compatible with the common
market. This does not, however, preclude the Commission from assessing
cases according to the particular criteria applying to regional aid64 and/or the

60
Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council
Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of
the EC Treaty, OJ L 140, 30.4.2004, p. 1.
61
Aid must be notified on a notification form as set out in Annex I, Part I to Regulation
794/2004. From 1 January 2006 notifications are transmitted electronically, unless otherwise
agreed between the Commission and the notifying Member State.
62
Article 87(3)(a) and (c) both provide a wide margin for the acceptance of State aid meas-
ures aimed at tackling regional problems in, respectively, regions that are disadvantaged com-
pared to the EU average and regions which are disadvantaged compared to the national average;
cf. Commission Communication, Multisectoral framework on regional aid for large investment
projects, OJ C 70, 19.3.2002, p. 8, as amended, OJ C 263, 1.11.2003, p. 3.
63
Over the years, the Commission has also adopted industry-specific or “sectoral” rules
defining its approach to State aid in particular industries (e.g. Commission Guidelines on State
aid to maritime transport, OJ C 13, 17.1.2004). None of the existing sectoral rules applies, in
principle, to State aid cases aimed at financing seaport infrastructures.
64
See Commission Regulation (EC) No 1628/2006 of 24 October 2006 on the application
of Articles 87 and 88 of the Treaty to national regional investment aid (Block Exemption
Regulation for regional aid), OJ L 302, 1.11.2006; Commission Guidelines on national
regional aid for 2007–2013, OJ C 54, 4.3.2006, p. 13.
260 nikolaos e. farantouris

horizontal rules which exist for certain categories of aid.65 The facts and the
characteristics of each case alone will determine the outcome. In the Port of
Rotterdam case, the construction of a sea wall and the widening and extension
of the maritime access route, which were subject to public financing, were
needed to extend the port and, therefore, enable the port operator to increase
its economic activities.66 The Commission considered that the construction of
that infrastructure would result in an increase in the value of the seabed on
which the land reclamation would be carried out in order to extend the port.
That increase was considered an indirect benefit for the port operator. However,
the Commission concluded that this benefit would be neutralised by the fact
that the port operator would pay a market price for the lease of the seabed on
which the land reclamation would be carried out. This market price would be
established by an independent valuer and would reflect the increased value of
the grounds as a result of the construction of the sea wall and the provision of
maritime access as well as possible future macro-economic developments.67
The Commission is also generally supportive of Public-Private Partnerships 68
for the financing and joint building of a new port or part of a port and for devel-
oping transport infrastructure projects. The involvement of the private sector in
ports has been seen as a tool to develop modern maritime infrastructure, improve
project design and value for money and ensure the achievement of a sustainable
European Transport system.69 The Commission has noted that where the deci-
sion to construct a new port or a new part of a port depends on the parallel
decision of a future service provider irrevocably to contract significant invest-
ments in that new port or new part of a port, Member States may provide that
authorisations are granted without any further requirement to this future service
provider: in case of a limitation of the number of future service providers,
Member States shall use an open, non-discriminatory and transparent proce-
dure.70 Where such a procedure is not respected in cases of public-private part-
nership arrangements, there is a presumption that State aid is involved.71

65
Cross-industry or “horizontal” rules set out the Commission’s position on particular cat-
egories of aid which are aimed at tackling problems which may arise in any industry and region
(e.g. Commission Guidelines on rescue and restructuring firms in difficulty, OJ C 244/2,
1.10.2004).
66
Cf. Commission Decision of 21 December 2005 in case N 503/2005 (Great Yarmouth
Outer Harbour, UK) OJ 29.3.2006, which also concerned an extension of a harbour.
67
Commission Decision of 24 April 2007 in case N 60/2006 (Port of Rotterdam), OJ C 196,
24.8.2007, point 48.
68
Generally, Commission Communication, Public-Private Partnership and Community Law
on Public Procurement and Concessions, COM(2005)568 final, 15.11.2005.
69
Cf. White Paper, European Transport Policy for 2010: Time to Decide, COM(2001)370
final, 12.9.2001, p. 61–62.
70
Commission Proposal for a Directive of the European Parliament and the Council, Market
Access to Port Services, COM(2004)654, 13.10.2004, Articles 11 and 12 (not adopted).
71
Commission vademecum, op. cit., para. 75.
 public financing in the port sector and state aid rules 261

The Commission is similarly supportive of investments in small ports

engaged in local coastal trades. Even where such measures involve state
aid72, experience has shown that such investments in outlying regions and
small islands may prove vital for the economic development of those areas and
for the economic cohesion of the EU. Moreover, generally speaking, experi-
ence has shown that limited amounts of infrastructure aid in favour of small
ports serving local interest have not threatened to distort competition or affect
trade between Member States to any significant extent. It is therefore quite
possible that public financing for such investments would be qualified as com-
patible with the common market.

VI. Final Remarks

Public financing of transport infrastructure may raise State aid issues at two
levels, i.e. at the level of the users and at the level of the manager/operator of
the infrastructure in question. In general, no State aid elements within the
meaning of Article 87(1) are present at the user level where transport infra-
structure is open to all potential users on equal and non-discriminatory terms.
On the other hand, where public infrastructure is used to facilitate a particular
user, thus providing a competitive advantage, the financing may fall within
the prohibition laid down in Article 87(1). Also, where the body managing
the infrastructure carries out an economic activity, any grant for infrastructure
has to be examined for State aid implications, with regard to the infrastructure
manager. Thus, when the Port Authority carries out many different activities
of which several may be deemed economic in character, it cannot be ruled out,
a priori, that the financing under scrutiny does not confer an economic advan-
tage to the operator.
The Commission has applied the criteria above individually, on a case-
by-case basis. No rules of a general nature exist. However, it appears that the
time has come for a more coherent legal framework for state aid in the port
sector. There are two possible options with regard to the issues arising from
the application of Article 87 and 88: The first rejects any legislative initia-
tive to clarify the EC Treaty provisions. The outcome of possible infringe-
ment procedures and Court rulings would in this case shape the legal
framework for ports and port services. The second is the “soft law” option,
i.e. elaboration of non-obligatory acts interpreting existing legislation
(Guidelines). In other sectors the Commission has issued Guidelines

72
As noted above, the issue of state aid is normally not relevant for port infrastructure
investments of purely local significance, where they would not, as a general rule, affect trade
between Member States under Article 87(1).
262 nikolaos e. farantouris

dealing essentially with the conditions under which state aid may be
authorised.73 In the presence of Guidelines, Member States have to notify to
the Commission their draft schemes and/or measures. Those schemes/meas-
ures are assessed and possibly authorised by the Commission in the light of
the Guidelines but still on the basis of their own features and merits. It is
submitted that this guidance and clarification of existing rules would be of
help to Member States, the port authorities74 and the Commission itself in
ensuring legal certainty.
Despite its initial reluctance,75 the Commission has recently announced76
its intention to adopt Guidelines on State aid to ports during 2008. The
Commission services have not yet issued any draft, apparently in expectation
of a study on competition between ports and the economic impact of public
financing currently carried out. Although it is difficult to anticipate the con-
tent, the Guidelines are likely to deal with cases in which public financing
does constitute aid and the conditions under which aid may be granted.
However, a possible future framework to provide guidance on aid measures in
the port sector needs to take into account at least the following:
First, there is no common definition of a “port” and, accordingly, of “port
infrastructure”. The relevant features and characteristics may vary according to
the geographical location of port facilities. For instance, whilst most ports in
the North Sea are located at a river mouth and, therefore, extend from the
seashore inwards, those in the Mediterranean usually extend from the seashore
outwards, which implies that part of the infrastructure is different. Having
said that, some form of classification is necessary. Secondly, the distinction
used by the Commission in assessing the public financing of infrastructure
(i.e. whether the financed infrastructure is available to any user or is dedicated
to a specific one) is not always easily applicable to ports. For instance, if the
user of the “supported” infrastructure (e.g. the terminal operator) is a private
business, the problem arises of the possible competitive advantage it can
be granted by using an infrastructure it has not paid for. This is related to the

73
E.g. Commission Guidelines on State aid to maritime transport, OJ C 13, 17.1.2004;
Commission Framework on State Aid to Shipbuilding, OJ C 317, 30.12.2003, p. 11, and
Commission Communication concerning the prolongation of the Framework, OJ C 260,
28.10.2006, p. 7.
74
Cf. European Commission Port Policy Workshop, Port Financing, Hamburg, 18–19
January 2007.
75
Commission Communication, Reinforcing Quality Services in Sea Ports: A key for European
Transport, COM(2001)35 final, 12.2.2001, point 3.3: “The Commission will continue to carry
out case-by-case examinations where the facts and specificities of each case alone determine the
outcome”.
76
Commission Communication, A European Ports Policy, COM(2007)616 final,
18.10.2007, point 4.2.
 public financing in the port sector and state aid rules 263

issue of recovery of investment through the rents applied to port land users
and the fact that, in publicly financed infrastructure, investment may be
totally, partially or not recovered at all, according to the “intensity” of public
support. Furthermore, a case of particular interest is the assessment of the
extension or improvement of an existing port infrastructure (e.g. a substantial
enlargement of a dock), already operated by a private business. Contrary to
public finance for the construction of an entirely new port or an entirely new
infrastructure within an existing port, the financing of existing infrastructure
is not that easy to assess from a competition point of view. Finally, any legal
framework must take into account the fact that EU ports face strong and not
always fair competition from non-EU ports. The latter may benefit from loose
environmental constraints, extremely cheap labour and less restrictive regula-
tion. Some non-EU countries have also tried to divert traffic to their ports by
means of discriminatory tariffs for land transport.77 Since any future Guidelines
will not be obligatory for them, there is a plausible concern that a clear disad-
vantage for EU ports in the relevant geographical market may result.

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 TONNAGE TAX AND TAX COMPETITION

Georgios Matsos*

I. Tonnage Tax versus Tax on the Net Profits

II. The Greek Tonnage Tax System
1. Introduction
2. The Constitutional Framework of the Tonnage Tax System
3. Integration of the Tonnage Tax in the Greek Tax System
A. History of the Tonnage Tax in Greece
B. Tonnage Tax and Income Tax
4. Practical Aspects of the Greek Tonnage Tax
A. Categories of Ships
B. Calculation of the Tonnage Tax
C. Inactivity of the Ship – Comparison to the Dutch Model
4. Conclusion
III. Shipping Taxation on an International Level
1. Double Taxation Agreements
2. Applicability of Treaty Provisions on the Tonnage Tax
3. “Establishments of Law 89”
4. Taxation of Shipping Business and EC Law
A. State aid Provisions
B. Code of Conduct for the Taxation of Enterprises
IV. Conclusion

I. Tonnage Tax versus Tax on the Net Profits

Taxation is by its nature one of the main elements distorting competition.

Whether based on net profits or not, the payable taxes are a factor which
escapes, principally, from the pure economic field and falls rather within state
policy. It is formed not necessarily by economic considerations; moreover, it
does not always have as a purpose the protection of fair competition. In fact,
sometimes taxation policy distorts competition on purpose.
Traditionally, most developed states around the world impose as their main
business tax a tax calculated on business profits. This tax is part of a more
general system of income tax, because it varies according to how much income

* Dr. iur., Attorney-at-Law.

266 georgios matsos

an entity acquires. Income tax is called “corporate tax” when it is imposed on

companies or similarly treated legal entities. It is considered worldwide as the
fairest form of taxation,1 as it is based, more than any other tax, on the ability
of the taxpayer to pay:2 Once the taxpayer makes profits, he/she pays. If
he/she does not make any profits, then no tax is due. In business taxation,
an income tax calculated in a fair way, based on the commercial notion of
profit,3 is widely accepted as the best instrument to prevent distortion of
competition.
In the taxation of the shipping industry, however, things work differently.
More and more countries worldwide are abolishing the taxation of net income
deriving from such activity and adopting instead the so-called tonnage tax
system. As its name implies, the tonnage tax is not calculated according to the
net profit of the shipping enterprise, but according to the tonnage of each
ship. Once this tax is paid, no other tax is imposed on the net income the
shipowner acquires from the shipping business.4
The tonnage tax is generally considered as a business-friendly tax. It char-
acterises maritime legal orders which try to be competitive on an interna-
tional level.5 The tonnage tax system enjoys this positive view, despite the
fact that the taxpayer has to pay tax even if he/she does not make any profit
out of his/her shipping business. The reasons for this positive view are the
following:
1. The simplicity of the tax. Tonnage tax requires no expertise, no documenta-
tion; no puzzling on the interpretation of complicated tax provisions, and
thus reduces significantly the cost of its management for shipping business.

1
Cf. Barbas N., Forologia Eisodimatos [Income Tax], 2nd ed., Thessaloniki, 2006, p. XI (in
Greek); Jakob W., Einkommensteuer, 3rd ed., Munich, 2003, p. 2, reports that income tax is
historically the newest and most sophisticated form of taxation.
2
In the Greek Constitution, the ability-to-pay principle is part of the principle of equal
treatment, laid down in Art. 4 (1) and (5) of the Greek Constitution. Cf. Finokaliotis K.,
Forologiko Dikaio [Tax Law], 3rd ed., Thessaloniki, 2005, p. 137 (in Greek).
3
Cf. Knobbe-Keuk B., Bilanz- und Unternehmenssteuerrecht, 9th ed. Cologne 1993, p. 17
et seq.
4
Some legal orders deviate from the pure tonnage tax system and impose a tonnage tax in
parallel to a tax system based on net profits. Cf. below in this chapter. This tonnage tax system
normally has to replace for all taxpayers or offer the option to replace income taxation on the
net profits with a pure tonnage tax system.
5
Cf. Moratis G., I forologia tis naftilias kai synafon drastiriotiton [The taxation of maritime
and other and related activity] [2003] ΔEE 1183 et seq (in Greek). Moratis reports that the first
introduction of the tonnage tax system in Greece in 1939 had not been done in order to
improve the competitiveness of the Greek flag, but in order to facilitate the collection of taxes.
It was for the first time in 1951, with the passing of the new Law no. 1880/1951, that the
Greek authorities characterised the tonnage tax as a tax aiming to bring ships under the Greek
flag. About the history of tonnage in Greece, cf. infra, subchapter II.2.a).
 tonnage tax and tax competition 267

2. Tax certainty. The taxpayer will not wonder whether the tax authorities
find in their inspections that more tax is due than has already been paid. It
is hardly possible for the taxpayer to commit tax evasion, since the main
variable of the tax is the tonnage of each ship, an element which cannot be
hidden. The same is true also for other variables of the tonnage tax (e.g.,
the age of the ship).
3. Economic efficiency. The tonnage tax becomes an integral part of the gen-
eral ship cost and thus enables the shipping entrepreneur to pursue his/her
economic activity without concerns about taxation faced by taxpayers in
other branches of the economy.
4. Transparency. The shipping business community can easily compare the
tax levels of each legal order and thus make taxation a factor of influence
for its decision to select a flag or seat of activity. On the contrary, in net
profits income taxation, the tax rate is only one of the factors which dictate
the level of taxation, together with the calculation of the tax base, docu-
mentation requirements and bureaucracy etc.
5. Last but not least, considerable reduction of the tax burden. The tonnage
tax rates are generally low enough to achieve a level of tax burden consider-
ably lower than that arising out of the general income taxation rules.
A major reason why this happens is the wish of the countries which apply
the tonnage tax system to keep their flags competitive as regards other
flags, because of the movable character of the shipping business.
All the abovementioned advantages make the tonnage tax system a consider-
ably advantageous system in comparison to the net profits system or, even
better, the corporate tax system. These are the reasons more and more devel-
oped countries are opting for the tonnage tax system and abandoning the
corporate tax system for the taxation of ships.
A comparative study would show that there are several diverging forms of
tonnage tax systems. This chapter does not deal with tonnage tax, which is
imposed in parallel with the ordinary corporate tax, but only with cases of
legal orders which abolish ordinary corporate tax in favour of the tonnage tax,
at least as an option for the taxpayer.
The rest of the chapter will use Greece as an example of the tonnage tax
system, not only because the reporter himself is Greek and is, thus, better
acquainted with the Greek system, but also because the Greek tonnage sys-
tem is a pure tonnage tax system, i.e., a system which completely replaces
corporate tax, and in addition it is one of the oldest in Europe and one of the
most sophisticated, accompanied by constitutional guarantees and often
used as a model for other countries which wish to develop tonnage tax
systems.
268 georgios matsos

II. The Greek Tonnage Tax System

1. Introduction
The tonnage tax system in Greece must be viewed not only as a part of the
Greek tax system, but mainly as a part of a consistent, as well as traditional,
economic policy which has as its purpose the support of the sector of interna-
tional maritime transport and international shipping business in general.
Greeks have a very long and very strong tradition in international maritime
transport which precedes the formation of the Greek state in the first half of
19th century. The commercial fleet owned by Greek nationals is by far the
biggest commercial fleet worldwide, while, at the same time, vessels registered
under the Greek flag in 2004 represented about 38% of the European Union
registered tonnage.6 For this chapter it is essential to research how important
is the role that the tonnage tax system has played in order to help a small
country achieve a first place in Europe and worldwide.
It is part of the general knowledge of the shipping industry in Greece that
no state policy has offered any help to Greek shipowners to gain the first place
worldwide. The same remains true regarding the Greek tonnage tax system.
The impressive outcome of Greek shipowners’ activity is due exclusively to
their own initiative and business spirit, as well as to their capacity to overcome
various restrictions imposed by state authorities all around the world.7
Thus, all efforts of the Greek state, including the introduction of tonnage
tax, do not have as their purpose helping the development of the Greek inter-
national shipping business, but only persuading Greek ship owners to bring
their fleets under the Greek flag. This attitude reflects the fact that there is
practically no way to keep ships under any kind of state control if shipowners
want to escape such control. Once they can, shipowners will definitely want
to escape any obligations imposed by the state if such obligations are too
heavy compared to international standards and prevent the development of
their business. A main obligation of this kind is taxation. Bringing ships to the
registry of a developed country thus requires that the legal order becomes
competitive compared to that of the open registries (flags of convenience).
The shipowners being always several steps ahead of the Greek authorities in
the field of the evolution and demands of the international shipping business,

6
This number reflects statistics before the accession of the ten new Member States on 1 May
2004. See “Kathimerini” of 13 June 2004, p. 1 et seq.
7
Papinianos (nickname of Tryfon Koutalidis) in his self-biography “O Dikighoros” [The
Lawyer], Athens, 2003, gives a lot of details on the late Greek shipowner Aristotelis Onassis and
the immense conflict between him alone and the US government in the early 1950s about the
transport of oil from Saudi Arabia.
 tonnage tax and tax competition 269

the question for Greece was to inspire adequate confidence in them, so that
they register their ships under the Greek flag by remaining competitive and
without fearing that things could change suddenly and they could face heavy
taxation and unfavourable conditions for their business. Regarding the fact
that all open registries, the main competitors of Greece, apply a tonnage tax
system, Greece had no choice for the taxation of vessels’ operation other than
to apply a tonnage tax system itself as well.

2. The Constitutional Framework of the Tonnage Tax System

Inspiring confidence in Greek shipowners was not easy, as Greece has a long
tradition of surprising businessmen in taxation matters. The only way to offer
the necessary confidence to shipowners was to give the tonnage tax system
constitutional protection: the Greek Constitution of 1975 explicitly referred to
Law No. 27/1975,8 regulating the tonnage tax, which had been adopted a few
weeks before the adoption of the Constitution. In this way the Constitution
granted the material provisions concerning international shipping business the
rank of lex superior.
Article 107(1) of the Constitution reads: Legislation enjoying legal force
higher than that of statutes, enacted before April 21, 1967,9 pertaining to the
protection of foreign capital, shall continue to enjoy such legal force and shall
be applicable to capital imported henceforth. The same legal force superior
rank is granted to the provisions of Part A, Titles A to D of Law No. 27/1975
“on the taxation of ships, imposition of special fee for the development of the
mercantile marine, establishment of foreign maritime enterprises and related
matters”.
This important constitutional provision is the basis of the regime which
governs the mercantile marine registered under the Greek flag.
The constitutional provision refers first not to Law no. 27/1975, but to
the legislation which was already in force before the introduction of Law
no. 27/1975. This legislation consists of the provisions of Law Decree (n.d.)10
2687/1953 which offer protection to foreign funds imported for investment
in Greece. According to Art. 13(1) of Law Decree no. 2687/1953, “Ships with
gross registered tonnage of at least 1500 koros,11 which are registered under

8
Law no. 27/1975 entered into force on April 22nd 1975 and has been published on the
Official Journal of the Greek Government no. A 77/1975.
9
21st April 1967 is the date of the military Coup d’état which resulted to the governing of
Greece by military dictatorships from that date until 23rd July 1974.
10
The expression Law Decree is the translation of the Greek term “Nomothetiko Diatagma”
(abbrev: n.d.).
11
Koros is a volume measure unit and corresponds to 2,86 m3.
270 georgios matsos

the Greek flag are also considered foreign funds in the sense of Articles 1 and
2 of this Law Decree”. Art. 13(4) extends the protection also to ships regis-
tered before the entry into force of Law Decree 2687/1953. Though the law
refers to “foreign funds”, ships under the Greek flag are always deemed to be
“foreign funds”, even if their funding is not foreign.
Submission to the protection of Law Decree 2687/1953 requires an act of
approval issued by the Greek government. In this act of approval the Greek
Government has the right to grant the shipping enterprise favourable terms
which deviate from the ordinary Greek legislation. This gives the Greek gov-
ernment the opportunity to offer very advantageous conditions to shipown-
ers, in order to register ships under the Greek flag. Such favourable conditions
concern tax matters, among others.12 The favourable conditions granted by
the Greek government with the act of approval cannot be withdrawn and are
not subject to any changes without the consent of the shipowner (Article 3(3)
Law Decree 2687/1953), thus also having constitutional rank. According to
the case law of the Supreme Civil Court, the act of approval is to be consid-
ered as law and not as an individual administrative act.13
Attention has to be drawn to the fact that, despite the explicit provision of
the Greek constitution that tax matters on the taxation of mercantile marine
are governed by Law 27/1975, the protection offered in tax matters by Law
Decree 2687/1953 and the “acts of approval” issued under its provisions to
ships under the Greek flag, should not be underestimated at all. “Acts of
approval” of Law Decree 2687/1953 can offer (and have really offered) the
shipping industry even more favourable conditions than those granted under
Law no. 27/1975.14 The act of approval is to be issued on every single ship
which is registered under the Greek flag. The act has nowadays become a
standard typical text for every ship, consisting of 26 terms in total.15 The
standardised text is amended and completed as soon as new developments
arise.
Both Law Decree 2687/1953 (Art. 10) and the typical act of approval con-
tain a “most favourite ship” clause, stating that, if more favourable conditions
are granted in the future to another ship submitted to the protection of Law
Decree 2687/1953, then the same more favourable conditions have to be

12
See below, section II.D.2, term no. 12 of the standardised act of approval, which in 2002
reduced the tonnage tax rates applicable according to the provisions of Law no. 27/1975.
13
See Moratis G., op. cit., p. 1185.
14
The “acts of approval” of Law Decree no. 2687/1953 are of great importance for all other
legal issues beyond taxation, including civil law, dispute resolution, public law, company law,
labour law and social security law. For more details about their importance in tax law matters,
see below, (section II.4.b).
15
See Moratis G., op. cit., p. 1186.
 tonnage tax and tax competition 271

extended to the ship already subject to the protection of this law. In this way,
a favourable amendment of the standardised text in favour of only one newer
ship registered under the Greek flag is practically automatically extended to all
ships under the Greek flag, since the registration of ships under the Greek
flag is almost always implemented by acts of approval of Law Decree no.
2687/1953.
An important procedural provision is that of Art. 12 of Law Decree
2687/1953, which provides that all disputes arising between the Greek gov-
ernment and the investor, including disputes in public law matters, have to be
resolved by means of arbitration, if they concern the protected investment.
Details on the formation of Arbitration Courts are contained in the act of
approval. This arbitration clause also comprises disputes in tax matters16 and
represents a strong incentive for foreign investments.

3. Integration of the Tonnage Tax in the Greek Tax System

A. History of the Tonnage Tax in Greece
A tonnage tax system was introduced for the first time in 1939. At that time
this measure was not attempting to give any tax incentive for the shipping
business or for the use of the Greek flag. The Greek government of that time
found this system convenient in order to catch large-scale tax fraud and tax
evasion in shipping business. On that basis, Law no. 2075/1939 introduced a
tonnage-based corporate tax system.
After the Second World War the taxation of ships was subject to several
changes. Finally, Law no. 1880/1951 introduced a mixed system, with ton-
nage tax stricto sensu for some categories of ships and tonnage-based corporate
tax for other categories. In this case the tax was calculated on the basis of
international indicators published in the Lloyd’s List of London.
A tonnage tax stricto sensu was introduced for the first time by Law17 no.
465/1968 by the military government of that time. After the restitution of

16
There are also other provisions in Greek legislation on the protection of foreign funds
providing for arbitration in tax matters. Strong reservations have been expressed against the
constitutionality of arbitration in such matters. The issue has been brought before the Special
Supreme Court of Greece (a Supreme Court which resolves diverging opinions of other
Supreme Courts) which has declared the arbitration provisions constitutionally proper, how-
ever, by a majority of only one (AED Decision no. 24/1993). In the case of investments and
ships under n.d. 2687/1953 no question on the constitutionality of arbitration can arise, since
this law itself enjoys constitutional rank. See Finokaliotis K., Forologiko dikaio [Tax Law], 3rd
ed., Thessaloniki, 2005, p. 418 et seq. (in Greek).
17
The term in Greek language is “anagkastikos nomos”, which would be literally translated
as “obligatory law”. This term refers to laws issued in Greece in the past by non-democratic
regimes, when no Parliament was available. As a translation, for example, with the words
272 georgios matsos

democracy in 1974 the new Greek government negotiated the definitive tax
regime with the representatives of the shipowners. These negotiations ended
in Law 27/1975, which has been put under constitutional protection, as has
already been mentioned above.

B. Tonnage Tax and Income Tax

Law no. 27/1975 applies to all ships registered under the Greek flag, even to
ships not falling under the private law notion of “ship”.18
The Greek tonnage tax is a tonnage tax stricto sensu. This means, first, that
it is no lump sum (tonnage based) corporate tax, like that in the Dutch system
or the new (2004) Italian system and, secondly, that its imposition excludes
the imposition of corporate income tax. The distinction between corporate
income tax and the tonnage tax is explicit in Law 27/1975. Art. 2 provides
that “1. The tax imposed according to the provisions of this law leads to tax
exemption concerning the tax obligations of the ship owner as well as the
shareholder or partner of domestic or foreign companies for income taxation
of any kind, regarding the benefits that arise from the operation of the vessels.
2. Exempted are also the capital gains that arise from the sale of the vessel,
from the payment of insurance indemnity or from any other cause”.19
There is no distinction between Greek and foreign shipowners or share-
holders, or between residents and non-residents of Greece. The tonnage tax is
imposed – and at the same time the income tax exemption is granted – on all
ships which are registered under the Greek flag. The income tax code (Law no.
2238/1994) in Art. 6(3) and (4), as well as in Art 103(1), explicitly confirms
that the income and corporate tax exemption is granted to all kinds of income
deriving from ships, to the extent that those ships are subject to the tonnage
tax of Law no. 27/1975.20 Thus, tonnage tax excludes income tax, as far as
ships under the Greek flag are concerned.

“obligatory law” or similar terms would be somehow absurd (i.e., they do not give the foreign
reader any incentive to distinguish “obligatory laws” from ordinary laws, since all laws are prin-
cipally of obligatory application), it has been chosen to translate the term “anagkastikos nomos”
just with the simple word “Law”.
18
See Art. 1(1) and (3) Law no. 27/1975. According to Art. 1 of the Greek Private Maritime
Law Code, a “ship” (gr.: ploio) is any vessel which has more than 10 koros registered tonnage
and has the power to move under its own steam.
19
Art. 2 (3) Law no. 27/1975 states that, where a domestic or foreign shipowning company
also has business of another kind beyond the ship operation, then the exemption from income
tax is equal to the part of its income assigned to the ship operation. The exempted part of
income is calculated proportionally to the gross income arising from the operation of ships and
the other business activities.
20
See also Barbas N., Forologia Eisodimatos [Income taxation], 2nd ed., Thessaloniki, 2006,
p. 204 and 339 (in Greek).
 tonnage tax and tax competition 273

The exemption from income and corporate tax is the largest possible, viewed
from the scope of the income tax object, i.e., it covers all possible kinds of
income. The following are exempted: 1) the benefits from the operation of
ships stricto sensu, i.e. the corporate business profits from the current ship oper-
ation; 2) the shareholders’ income of any kind, if such income (dividends)21
derives from the corporate profits deriving from the operation of ships;22
3) capital gains of any kind arising from the transfer of the ship ownership.23
The exemption from income tax is however not general, to the extent that
it is viewed from the angle of the income tax subject. If the shipowner does
not operate the ship himself, then no immediate income tax exemption is
granted for the taxpayer who does operate it.24 The exemption from income
tax is, according to the general provisions, limited only to the taxpayer who is
subject of the tonnage tax. If the shipowner charters the vessel to another
person or entity (lessee) by way of time, voyage or bareboat charter, then the
latter, not being subject to the tonnage tax, does not in principle enjoy any
exemption from income tax. However, full income tax exemption is still pos-
sible by the creation of a so-called “Establishment of Law 89”, which is a
powerful tool of tax policy for the shipping industry in Greece.25

4. Practical Aspects of the Greek Tonnage Tax

The tonnage tax applies to all vessels under the Greek flag, without distinction
according to whether they are owned by tax residents or non-residents of
Greece.26

21
Corporate dividends are anyway not subject to any taxation at all, according to the Greek
tax law in force. It is a curiosity of Greek tax law that the text of the Law (Art. 24(1) of Law no.
2238/1994) explicitly provides that dividends are taxable income. This is a provision which
definitely no longer applies and has to be considered as abolished after the corporate tax law
reform of 1992. For details see Matsos G., Investitionen deutscher Steuersubjekte in griechische
Kapitalgesellschaften, Bayreuth, 2001, p. 102 et seq.
22
Although dividends are not subject to tax at all, Art. 106(2) of Law no. 2238/1994, a
provision of high practical importance, states that income exempted from tax is taxed in the
name of the corporation if such income is distributed to the shareholders. However, in the case
of income deriving from the operation of ships, Art. 103(1) of Law no. 2238/1994 explicitly
states that Art. 106(2) does not apply in the case of income deriving from the operation of ships
if the ships are subject to tonnage tax.
23
According to Law no. 1587/1950 the tax on the transfer of immovable property is imposed
also on the transfer of ship ownership. However, this provision has no practical meaning for the
international shipping business, as ships of over 1,500 grt enjoy full exemption from the tax on
the transfer of immovable property.
24
See Moratis G., op. cit., p. 1189. See also Circular no. 32/1975 of the Greek Ministry of
Finance.
25
See below, section III.3.
26
There is no restriction in Greek law concerning the residence of the shipowner. The only
restriction concern the nationality of the owners. According to Art. 5 of Greek Public Maritime
Law Code, amended by Presidential Decree no. 11/2000, Greek ships have principally to be
274 georgios matsos

A. Categories of Ships
Article 3 of Law no. 27/1975 allocates ships subject to the Greek tonnage tax
to one of two categories.
Category A includes all ships involved in the international transport of
goods. This category includes:
1. All machine-powered freighters, tankers and refrigerated ships of gross
registered tonnage of 3,000 koros or more.
2. Iron-constructed freighters for solid or liquid freight and refrigerated ships
of gross registered tonnage between 500 and 3,000 koros, if they sail between
Greek and foreign ports, or if they sail only between foreign ports.
3. All passenger vessels, independently of their gross registered tonnage, car-
rying out voyages from Greece to foreign ports, or only between foreign
ports.
4. Passenger vessels of gross registered tonnage of 500 koros or more which
have carried out during the past year and for at least 6 months exclusively
cruise voyages between Greek ports, or Greek and foreign ports, or between
foreign ports, open to the public and aiming exclusively at the entertain-
ment of the passengers.
5. Navigable constructions which correspond to more than 5,000 koros and
are used in order to explore the bottom of sea for drilling, pumping, refin-
ing and storing of oils or natural gases.
Category B comprises all other vessels not included in Category A, whether
machine-powered or not.
Obviously, only Category A is of interest for the international shipping
business and, consequently, only the taxation of this category will be dealt
with below. It has to be pointed out that only the tonnage tax for this category
of ships is covered by the constitutional protection of Art. 107 of the Greek
Constitution, as the Greek Constitution refers to Titles A to D of Part A of
Law 27/1975 (Articles 1 to 11) and the taxation of Category B is regulated in
Title E (Art. 12) of the law.

B. Calculation of the Tonnage Tax

The tax is calculated on the basis of various tax rates depending on the age of
the ship, corrected by the use of a coefficient which varies according to the

owned as to more than 50% by Greek nationals or EU nationals. However, under Article 13(2)
of Law Decree no. 2687/1953, Greek ships can also be owned by foreigners, including foreign
companies. On this issue, see Theocharidis G. & Matsos G., The New U.S. Regulations regard-
ing the Taxation of Income deriving from Vessel Operation [2003] ENΔ 417, 426 (in Greek).
 tonnage tax and tax competition 275

total gross registered tonnage. The tax rates were originally set by Art. 6 of Law
27/1975 as follows:
N.B.: Year 0 is the next year after the year during which the vessel is commer-
cially exploited for the first time.
With an annual 4% rise the above rates had increased in 2002 as follows:

Age of the vessel (years) Rates in US $ per koros (to increase 4%

annually since 1-1-1976)
0–4 0.53
5–9 0.95
10–19 0.93
20–29 0.88
30 and over 0.68

However those rates had led the Greek flag to lose its competitiveness as
regards other flags, and especially flags of convenience. Thus, in 2002 the

Age of the vessel (years) Rates in US $ per koros

0–4 1.1024
5–9 1.9760
10–19 1.9344
20–29 1.8304
30 and over 1.4144

Greek authorities were obliged considerably to reduce the tax rates as they
were calculated according to the annual 4% increase since 1976.
It is remarkable that the tax rates could not have been reduced by law, as the
provisions of Art. 6 Law 27/1975, which had set the annual 4% increase, enjoy
constitutional rank and cannot be modified by law. The tax rates were, thus,
decreased by means of an amendment to the approval acts issued under Law
Decree 2687/1953. These approval acts have the force of constitutional law, in
the same way as the protected provisions of Law 27/1975.27 At the same time,
through the application of the “most favourite ship” clause of Art. 10 Law
Decree 2687/195328 the reduction of tax rates in favour of only one ship through

27
See supra, section II.2.
28
See supra, section II.2.
276 georgios matsos

an approval act automatically generated the right of all other ships under the
protection of Law Decree 2687/1953 to enjoy the same tax reduction.
Thus, the new typical term 12 of the acts of approval contains the new tax
rates which are in practice in force in Greece today and for the future. The
new tax rates had remained unchanged until 31-12-2007. Until that date the
new tax rates had not increased at all. After that date the 4% annual increase
again applies, calculated on the tax rates as they were reduced in 2002.29
The procedure followed in the tax reduction of 2002 shows how important
the Law Decree 2687/1953 is for the lawmaking practice of mercantile marine,
even in tax law, a field not directly regulated by this Law Decree.
The rates which are in force today cannot be found in Law 27/1975 or any
other “normal” legal text published in the Official Journal. They are the
following:

Age of the vessel (years) Rates in US $ per koros (4% annual increase
after 1-1-2008)
0–4 0.318
5–9 0.570
10–19 0.558
20–29 0.528
30 and over 0.408

The old, non-reduced tax rates contained in Art. 6 of Law no. 27/1975 are,
thus, applicable only to any ships under the Greek flag which are not pro-
tected by Law Decree 2687/1953. No such ships are known in practice.
According to Art. 6 of Law no. 27/1975, the tax rates in force have to be
multiplied by the total registered koros and then multiplied again by the fol-
lowing coefficients according to the gross registered tonnage of the ship:

Koros Coefficient
100–10,000 1.2
10,001–20,000 1.1
20,001–40,000 1.0
40,001–80,000 0.9
80,001 and over 0.8

29
The Greek text of the new amended “term 12” of the approval acts can be found in the
paper of Moratis G., op. cit., p. 1188, footnote 41.
 tonnage tax and tax competition 277

The standardised term 12 of the approval acts, as modified in 2002, provides

for further reduction of the tax which results from the calculation contained
in Art. 6 of Law 27/1975. According to term 12B a tax reduction of 50% is
granted for ships of gross registered tonnage of between 40,001 and 80,000
koros and a tax reduction of 75% for ships of gross registered tonnage of
80,001 koros and more. The tax reduction is calculated on the amount of tax
resulting from the calculation set out in Art. 6 of Law 27/1975.
Thus, the tax is finally calculated as follows:
Tax due = tax rate × total koros × coefficient × coefficients of term 12B.

C. Inactivity of the Ship – Comparison to the Dutch Model

If the ship is not used for commercial exploitation because of maintenance
work, lack of work or any other cause, the tax due, according to Art. 6 of Law
27/1975 and term 12 of the standardised approval act, is reduced at the rate
of the days of non-use subtracted from the number of days in the calendar
year. The tax reduction is granted for ships of Category A if the total period of
non-use is longer than two months in any one tax year and the year before it.
If the total period of non-use is shorter than two months, then no tax reduc-
tion is granted.
The burden of proof of the inactivity of the ship is on the taxpayer. The
inactivity has to be proven by certificates issued by the competent authority in
Greece or a Greek consular authority. If no such certificate is available, then
the taxpayer can also produce certificates from foreign authorities and, if even
foreign certificates cannot be produced, then the taxpayer has to show the
extract from the ship’s log.
The tax reduction offered for the period of the year in which the ship is not
used commercially has an indirect, but evident relationship with the principle
of the “ability to pay” taxes. This provision of Greek law is comparable to a
similar provision of the newly introduced (in 2004) Italian tonnage tax system
and makes the Greek tonnage tax, still a tonnage tax stricto sensu, financially
identical to a tonnage based corporate tax (with the exception of the calcula-
tion of damages).
Yet there are still several crucial differences with the tonnage based corpo-
rate tax (the so-called “Dutch model” of tonnage tax). The most important is
that the taxpayers, unlike in the Dutch model, do not have any choice whether
they submit their ships to the tonnage tax or not. The tonnage tax is applied
independently of the taxpayer’s will.30 Exemption from income and corporate

30
There is no doubt, however, that the tonnage tax system enjoys full support among ship-
owners active in Greece. Probably no one in Greece would opt for a regular income or corpo-
rate tax system, even if such a possibility were open.
278 georgios matsos

income tax is granted anyway, the Greek tonnage tax being formally a special
tax other than those taxes and not a lump sum income tax.
In other words, income deriving from ships registered in Greece is princi-
pally not subject to income or corporate income tax at all. A key aspect directly
related to this issue is the constitutional protection given to the tonnage tax
system. This protection would be technically more difficult to guarantee if the
tonnage tax formed part of the income tax system.
The non-application of the whole legal framework of income tax provisions
means further that no provision of the extremely complicated and often irra-
tional and unnecessary procedural tax law applies in tax matters. The exclusion
of application of tax procedural provisions is confirmed by the Greek Code on
Tax Book-keeping and Accounting (gr.: Kodikas Vivlion kai Stoicheion –
KVS).31 Art. 4(2) KVS provides that establishments of Law 89 do not have to
record their transactions in the standard Double-Entry Book-Keeping practice
(called in Greece “Tax Book-keeping of the Third Category”), but in a much
simpler Single-Entry Book-Keeping practice (called in Greece “Tax Book-
keeping of the Second Category”).
Last but not least, income taxation is subject to many and frequent amend-
ments. Total exclusion of the income tax system offers the shipowners, from
the point of view of economic environment, a level of certainty considerably
higher than the certainty enjoyed by other branches of economy. The tradi-
tion of 69 years of tonnage tax and, by now, 40 years of tonnage tax stricto
sensu plays an important role in establishing confidence that, also in the future,
things will not greatly change. Though such psychological effect is, from a
purely legal point of view, hardly important, compared to the constitutional
protection of the tonnage tax system, real economy is often based more on
such effects than on legal guarantees.

4. Conclusion
The Greek model combines the advantages of a lump sum income taxation
system and the tonnage tax system stricto sensu. Taking into account the period
of the year in which the ship is inactive by reducing the tax proportionately by
that time leads to taxation closer to the real ability of the taxpayer to pay. At
the same time, the total exclusion of any income tax issues, combined with
strong constitutional guarantees, offers the shipowners the security they need
in order to choose Greece as the registration country of their ships and/or as a
business location.

31
Presidential Decree no. 186/1992, FEK A 89/1992.
 tonnage tax and tax competition 279

III. Shipping Taxation on an International Level

1. Double Taxation Agreements

A crucial point for the applicability of any tax system is the international allo-
cation of taxing powers between countries. This allocation usually takes place
through the conclusion of Double Taxation Agreements. The name “Double
Taxation Agreements” does not by itself show how important those treaties
are. As a matter of fact, they are “taxing powers allocating treaties”: If a tax
treaty, even bilateral, does not allow a country to tax a certain kind of income,
then this country simply cannot apply any system it may have introduced.
These consequences of tax treaties are of obvious importance for mercantile
marine, an economic sector which is by definition international.
Tax treaties are usually based on the OECD model, which is constantly
updated. Though the OECD model tax convention is a legally non-binding
text, it has contributed a lot to the standardisation of most tax treaty provi-
sions worldwide and of their interpretation. Thus, the model provision of the
OECD on the taxation of the shipping industry is highly influential for the
final choice of the contracting states.
The OECD Model Tax Convention contains a special provision on the
taxation of ships. Article 8(1) of the OECD Model, “shipping, inland water-
ways transport and air transport”, reads: “Profits from the operation of ships
or aircraft in international traffic shall be taxable only in the Contracting State
in which the place of effective management of the enterprise is situated”.
Greece, being aware of the tax allocating power of tax treaties and wishing
to protect the attractiveness of the Greek flag, includes in almost all its tax
treaties32 a standardised provision for the taxation of shipping business which
uses a criterion for the assignment of taxing rights to the contracting states
substantially different from that proposed by the OECD Model Tax Con-
vention in its Article 8.
One kind of typical provision in Greek tax treaties (e.g., Art. 8(1) DTC
Greece-Norway “Shipping and Air Transport”) reads as follows: “Profits from
the operation of ships in international traffic may be taxed in the Contracting
State in which the ships are registered or by which they are documented”.
Another kind of typical provision (e.g., Art. V(1) DTC Greece-USA) reads:
“Income which an enterprise of one of the Contracting States derives from the

32
Greece has concluded, apart from the regular Double Taxation Agreements, a big number
of Double Taxation Agreements which concern only income from ships and aircraft. A recent
list of such Agreements can be found in: Forologikos odigos (Tax guide), Athens, Deltio
Forologikis Nomothesias, 2006, p. 405 et seq.
280 georgios matsos

operation of ships or aircraft registered or documented in that State shall be

exempt from tax by the other Contracting State”.
Unlike the OECD Model, in both the abovementioned tax treaties the
main criterion used for the assignment of taxing rights is not the place of
effective management of the shipping enterprise, but the state of registration
of the ship. The difference between the two kinds of provisions is that in the
second case (USA) the treaty provision refers to the term “enterprise of a
Contracting State”, while in the first case (Norway) it does not.33
Analysing this peculiarity of Greek tax treaties, it should first be remarked
that the standard OECD Model Tax Convention proposed provision, by using
the exclusive criterion of the place of effective management, aims to prevent the
use of post-box companies in the other contracting state, just in order to achieve
tax exemption in the contracting state where the business is really situated. In
addition, the exclusivity of taxation in the State of effective management, by
derogation from the general provision of Art. 7 OECD Model on business
profits (where the permanent establishment principle applies as a taxing powers
allocation criterion), aims, on the one hand, to guarantee the avoidance of
double taxation in any case and, on the other hand, to prevent the formation
of “post-box” permanent establishments and possible exemption through the
formal assignment of the ship operation to such permanent establishments.
Thus, Art. 8 OECD Model Tax Convention, by ensuring the avoidance of
Double Taxation, at the same time takes strongly into consideration the
mobile nature of shipping business, in order to prevent so-called “treaty shop-
ping” (i.e. establishment in a country just because of its network of favourable
tax treaties).
Greece, on the other hand, has deposited an official reservation to Article 8
OECD Model concerning the treaty provisions on international shipping
business, in order to be able to use as a criterion for the assignment of exclu-
sive taxing rights not the place of effective management but the place of regis-
tration of the ship.
It is evident that Greece tries in that way to support the Greek flag, by offer-
ing full tax exemption in the other contracting state for its enterprises only if
its ships fly the Greek flag. If the standard OECD provision were used, then
tax exemption on the basis of Art. 8 would be granted independently of the
flag used. With the provision it uses, Greece wants to guarantee full tax

33
This can have only little practical importance, as Art. 1 of the Norwegian-Greek treaty,
following the example of Art. 1 OECD Model Tax Convention, explicitly provides that “The
Convention shall apply to persons who are residents of one or both of the Contracting States”.
Thus, Art. 8 of the Treaty does not apply, principally, to enterprises other than those “of one of
the Contracting States”.
 tonnage tax and tax competition 281

exemption abroad through its treaty network only for the Greek flag and for
Greek-based enterprises.
The Greek model tax treaty provision on the taxation of ships has two
important effects concerning competition between legal orders. The first is
that the shipping enterprise can change the place of its effective management –
provided that the place of management remains in a country belonging to the
Greek tax treaty network – without changing tax forum, as long as it stays
under the Greek flag. The second important effect is that a shipping enterprise
with its seat in Greece can change tax forum for all or some of its ships simply
by changing the flag of those ships. The Greek model provision permits exactly
what the OECD model tries to avoid: forum shopping.
What happens if a ship owned or operated by an enterprise based in Greece
uses the flag of a third state? According to the standard OECD interpretation
of Article 8,34 the provisions of Article 8 have a relationship of lex specialis
towards the general provisions of Article 7 (business profits). Thus, if for any
reason Art. 8 does not apply – if, in our case, the ship does not use the flag of
any contracting state, but that of a third state – then it is the general business
profits provision of Article 7 which applies for the bilateral relationship
between the contracting states. The latter provision is based on the permanent
establishment principle, i.e. business profits are taxed only in the place of resi-
dence and are exempted in the other contracting state if there is no permanent
establishment there. By combining the flag principle and the permanent
establishment principle, shipping enterprises with their seat in Greece could
practise “treaty shopping” by choosing countries in which they would or
would not retain offices (i.e., permanent establishments).
Some contracting partners of Greece are aware of the problems that the
Greek provision can cause and impose various provisions to avoid such prob-
lems. For example, in the tax treaty with Germany, the State of registration
criterion is used for ships under the Greek flag and the place of effective man-
agement criterion is used for German enterprises.35 Both Germany and Greece
in that way achieve the purposes they are pursuing with their treaty policy.
Another solution is offered by the revised tax treaty between Greece and
Italy which is currently in force.36 Art. 8 of the revised treaty reads as follows:

34
See for example no. 5 of the official OECD commentary referring to the bareboat charter
of ships. See also Vogel K., Doppelbesteuerungsabkommen, 3rd ed. Munich 1996, p. 670 refer-
ring explicitly to the German-Greek tax treaty.
35
Where a ship belonged to a German enterprise and flew the Greek flag, a conflict would
arise which would not be easy to resolve.
36
The revised Italian-Greek tax treaty was signed on 3rd September 1987, and entered into
force on 20th September 1991. In Greece it was ratified by Law no. 1927/1991. The revised
treaty replaced the old Italian-Greek treaty which had been signed on 19 March 1965.
282 georgios matsos

1. Income derived from the operation of a ship in international traffic shall be

taxable only in the Contracting State in which the ship is registered.
2. Subject to the provisions of paragraph 1, income derived by an enterprise of
a Contracting State from the operation of a ship in international traffic shall
be taxable only in that Contracting State.
In this way, the possibility of treaty shopping is eliminated. Priority is given to
the criterion of flag, but if neither the Italian nor the Greek flag is used, then
the allocation of taxing rights takes place by the use as a criterion of the seat
(residence)37 of the shipping enterprise.38

2. Applicability of Treaty Provisions on the Tonnage Tax

It seems problematic, at a first glance, whether the exemption provisions of
the tax treaties also include the tonnage tax stricto sensu, which, unlike the so-
called Dutch model, is not an income tax properly speaking. The Dutch model
describes a tonnage based income tax and falls in principal clearly under the
scope of tax treaties.
Under the Greek model, the problem would exist if the contracting state
the taxing power of which is excluded were that which imposed a tonnage tax
stricto sensu. If that contracting state (e.g., Greece) is assigned the taxing power,
then it can apply any tax it wishes. The problem has its roots in Art. 2 OECD
Model Tax Convention, which regulates the matter of the taxes covered; it
comprises principally taxes on income and capital. Art. 2(1) reads: “This
Convention shall apply to taxes on income and on capital imposed on behalf
of a Contracting State or of its political subdivisions or local authorities, irre-
spective of the manner in which they are levied.”
A solution can be found in Art. 2(4) of the OECD Model, which reads:
“The Convention shall apply also to any identical or substantially similar taxes
that are imposed after the date of signature of the Convention in addition to,
or in place of, the existing taxes.” The Greek tonnage tax stricto sensu is covered
by this provision to the extent that it in 1968 replaced a tonnage based income
tax. This solution applies to tax treaties signed before 1968. For the rest of the
tax treaties, the tonnage tax has to be qualified as an income tax in order to be
covered by the treaty text. A teleological interpretation would support such a
qualification.

37
According to Art. 3 (1f ) of the Italian-Greek Treaty (Greek Law no. 1927/1991) the term
“enterprise of a contracting state” means enterprises operated by a resident of that contracting
state.
38
The provision of the Italian-Greek treaty is technically better, compared to that in the
German-Greek treaty, since, by giving priority to one criterion, it avoids unresolved conflicts
between the two criteria.
 tonnage tax and tax competition 283

In any case, the application of a tax treaty on the tonnage tax should be
examined ad hoc, on the basis of each applicable tax treaty and depending on
the exact treaty text which corresponds to Article 2 OECD Model Tax
Convention.

3. “Establishments of Law 89”

Both the applicability of the tonnage tax only to shipowners and the gaps left
open by the incomplete and imperfect protection network of tax treaties were
making a complementary exemption tool necessary for the Greek shipping tax
system. On the one hand, maritime business regularly needs structures other
than the exploitation of the vessel directly by its legal shipowner. On the other,
the use of flags of convenience was a reality that Greece had to live with. With
the exception of Cyprus and the new EU Member State Malta, no other flag
of convenience is covered by the Greek tax treaties network.
Consequently, Greece has developed a tax exemption tool for the benefit of
ship operating enterprises of any kind. This tool is called the “Establishment
of Law 89/1967”,39 usually known simply as “Establishment of Law 89”, due
to the first law which permitted foreign enterprises to found establishments in
Greece which would enjoy full income tax exemption. Nowadays the founda-
tion of such establishments for enterprises involved in the shipping business
forms part of Law 27/1975 (Article 25 and 26 of Law 27/1975, amended for
the last time by Laws no. 3427/2005 and 3550/2007).40 Unlike the tonnage
tax provisions, the provisions on “Establishments of Law 89” enjoy no consti-
tutional protection.
Through “establishments of Law 89” it is possible to achieve tax exemption
for shipping businesses of any kind and form, not just for ships which fly the
Greek flag, but also for ships which use foreign flags, including flags of conven-
ience. Almost thirty years after the introduction of tonnage tax for the first time
(in year 1939), it was clear that the tonnage tax alone was not enough to attract
ships under the Greek flag and/or shipping business in Greece. Thus, the Greek
authorities of that time took the decision to stop trying to impose the Greek
flag on Greek-owned ships and to begin offering guarantees to the Greek-owned
fleet that shipping business in Greece would enjoy full tax exemption even if
the ships remained under a foreign flag, if the shipowners wanted that.

39
The Law no. 89/1967 is a Law issued by the military government of that time and, thus,
also an “anagkastikos nomos”. Cf infra, fn. 17.
40
Technically, Law no. 89/1967 after its last revision by Law no. 3427/2005, does not
contain any more tax exemption provisions. However, the day-to-day language still refers to
“Law 89”.
284 georgios matsos

The tax exemption, granted by Law 89/1967 and all subsequent laws, is
general41 and covers income tax and also other taxes, including stamp duty.42
Article 25(3a) Law no. 27/1975 provides that “the exemptions … referred to
in par. 1, are the following: a. Exemption from every tax, duty, fee and charge
imposed in favour of the State or of any third parties for the income derived
from activity or services which are mentioned in par. 1 of this Article. Exemp-
tion is also granted from the special tax on banking services, turnover tax,
and every stamp duty objectively, as well as any charge or duty in favour of
third parties – with the exception of duties corresponding to services really
rendered – that is imposed on the contracts, cash flow and payments of any
kind and any other acts which are carried out by the abovementioned offices
or establishments or on behalf of the represented enterprises, to which par. 1
of this Article refers”.43
According to Article 25(1) of Law no. 27/1975, the activities Greek and
foreign enterprises enjoy exemption for are the following: management,
exploitation, chartering, insurance, settlement of averages (damage of the ves-
sel or its cargo at sea), as well as brokerage of sales, purchases, shipyard
works, chartering, or insurance of vessels under the Greek or a foreign flag.
The vessels must have more than 500 grt and be engaged in the international
mercantile shipping business. The activities mentioned in Art. 25(1) of Law
27/1975 cover practically every kind of activity in international shipping
business.
An “Establishment of Law 89” is founded by a special permit granted by a
joint decision of the Greek Ministry of Economy and the Ministry of
Mercantile Marine. The operating expenses in Greece must be covered by
annually importing and converting to the local currency a minimum of US$
50,000. The head office of the Establishment must place with the Greek
Treasury a guarantee equivalent to US$ 10,000.

41
There is however one case in which income from “Establishments of Law 89” is subject to
income tax. This is the case of Art. 106(2) of the Income Tax Code, if exempted income is
distributed by Greek companies (see above, fn. 22). Cf. Moratis G., op. cit., p. 1190; Theocharidis
G. & Matsos G., op. cit., p. 429. This case has little practical importance, as most companies
which create establishments of Law 89 are foreign. The Court of Justice of the European
Communities in its decision of 4th October 2001 (case C-294/99, Athinaiki Zythopoiia, ECR
I-6797) held this provision to be contrary to Art. 5(1) of Directive 90/435/EEC. Greece has
implemented this decision in its corporate tax law only partly, so that Art. 106(2) has remained
totally unchanged. For details, see Barbas N., op. cit., p. 344 et seq.
42
It seems however that the Greek authorities interpret the exemption regulations in a way
that in most of the cases leads to no exemption from stamp duty. See Moratis G., op. cit.,
p. 1191.
43
Exemption from VAT in international transport is granted directly by European
Community law (Art. 148 of Directive 2006/112/EC). The Directive’s provisions are imple-
mented in Greek law through Art. 27 of Law no. 2859/2000.
 tonnage tax and tax competition 285

Greece offers through the “Establishments of Law 89” a general regime of

tax exemption for activities in international shipping business of every kind.
Since the exemption applies to ships of any flag, a ship managed in Greece
through an “Establishment of Law 89” and not registered under the Greek
flag would not pay any tonnage tax in Greece – as the Greek tonnage tax
applies only to ships under the Greek flag – and will not at the same time pay
any income tax at all. The generosity of the Greek system reveals its real dimen-
sions, by taking into account the effect of the Double Taxation Agreements.
According to the standard Greek provision of Art. 8, Greece does not have any
taxing rights if a ship does not fly the Greek flag.
With “Establishments of Law 89” Greece offers shipowners of any nation-
ality the opportunity to fly flags of convenience on their ships, assign their
ships to off-shore companies, manage their ships from Greece and, at the same
time, enjoy full tax exemption in Greece by paying no tonnage tax and no
other tax in Greece. Since a tonnage tax comparable to the Greek tonnage tax
is imposed also by countries with open registries, the final financial outcome
of taxation would not make much difference for the shipowner. From this
point of view, an exemption tool like the “Establishments of Law 89” is neces-
sary in order to avoid competition distortions on an international level intro-
duced by the existence of “flags of convenience”.

4. Taxation of Shipping Business and EC Law

A. State aid Provisions
Special questions are posed about the compatibility of the Greek legislation
on international shipping business and, in particular, of the tax system applied
to international shipping business with the European Community law on
State Aid.
The tonnage tax system in force, including the provisions on “Establishments
of Law 89”, is a tax regime introduced in 1975, i.e. before the accession of
Greece to the European Communities.44 Thus, it has to be regarded as an
“existing aid” (Art. 88 EC Treaty) which is kept under constant review by the
European Commission, but does not need to be approved under Art. 87 EC
Treaty. The current Greek system is, thus, valid and principally legal from the
point of view of State Aid law.
According to a consistent Commission view, tax incentives given to inter-
national shipping business are state aid, which however has to be judged
as compatible with the common market rules, considering the extremely

44
Effective on 1 January 1981.
286 georgios matsos

competitive nature of this sector on an international level and, especially, con-

sidering the competition which EU registries face from open registries (flags
of convenience).45
The opinion expressed in the Commission document of 1997 entitled
“Community guidelines on State aid to maritime transport” is that zero tax is the
ultimate limit which the European Commission will accept as a maximum level
of aid.46 However, the revised document of 2004 refers also to cases in which
zero tax would not be accepted.47 The Commission will have to review this posi-
tion, since the nature of the shipping business and the reality of hard competi-
tion in the world shipping business should allow full tax exemption in all cases.

B. Code of Conduct for the Taxation of Enterprises

The Council of the EU during the ECOFIN Council of 1 December 1997
issued the legally non-binding Code of Conduct for business taxation in the
form of a Resolution.48 Under this Code of Conduct the Council undertook
the obligation to examine “measures which affect, or may affect, in a signifi-
cant way the location of business activity in the Community” (point A of the
Resolution).
The group which was set up by the Council according to point H of the
Code of Conduct (known as the “Primarolo Group” from the name of its
president) submitted its report to the Council on 29 November 1999.49 In
this report the Greek tonnage tax was examined, together with other EU
Member States’ shipping taxation measures, on the basis that it was possibly a
harmful tax competition measure.
The Primarolo Group explicitly judged both the Greek tonnage tax and the
“Establishments of Law 89” to be compatible with the Code of Conduct and
stated that it was a measure which did not need to be revised by the Greek
authorities.50 The Group adopted the same attitude towards all shipping taxa-
tion regimes in the EU, by following the acknowledgement in the Council
Resolution of 1 December 1997 of the “need to consolidate the competitive-
ness of the European Union and the Member States at international level”.
The Group “recognised the great importance of this issue to its assessment of

45
Community guidelines on State aid to maritime transport, OJ C 205 of 5.7.1997, p. 5
et seq., point 1.2. and Revised Community guidelines on State aid to maritime transport, OJ C
13 of 17.1.2004, p. 3 et seq., point 1.
46
Community guidelines (1997), op. cit., point 10.
47
Community guidelines (2004), op. cit., point 11.
48
OJ C 2 of 6.1.1998, p. 2 et seq.
49
Press Release: Brussels (29 February 2000) – Nr: 4901/99.
50
Examined under point C004 of the Report, op. cit. (fn. 49).
 tonnage tax and tax competition 287

certain of the measures related to the shipping industry” and agreed that “ship-
ping is a global market and that the Community faces strong global
competition”.51
However, it is remarkable that the decision was not unanimous. Some
Member States52 adopted the position that “the measures should be assessed
as harmful but that in its deliberations the Council should take account of the
issues of competitiveness by requiring rollback only if wider international
action was taken on similar measures”.53
This position reflected an approach which was considered narrow-minded
and did not take into account the nature of the international shipping busi-
ness. The development of this kind of business on the national and European
level can be achieved only if the national and European authorities understand
what the Greek authorities have already well understood and practised in the
post-war era: “Ships have a helm and they easily abandon the country”.
It is, thus, at least encouraging to observe more and more EU countries
adhering to the only competitive tax system for international shipping busi-
ness, the tonnage tax system. The national authorities should be encouraged
to give tax and other necessary incentives to international shipping business,
by guaranteeing to their shipowners the freedom to create competitive
enterprises.

IV. Conclusion

The generosity which the Greek authorities show to the shipping industry
reveals the power of the shipping industry towards the tax authorities all
around the world; this generosity was never intended to attract foreign ship-
ping business to Greek territory, but to avoid the expatriation of such Greek-
owned business. The shipowners, being probably the only taxpayers who have
won the eternal battle between taxpayer and tax authorities, have managed to
pay only minimal tax on their businesses. Greece was obliged to offer strong

51
Point 63 of the Report, op. cit. (fn. 49).
52
The Italian, Finnish and Swedish delegations, according to Footnote 41 of the Report,
op. cit. (fn. 49).
53
Point 63 of the Report, op. cit. (fn. 49). It is remarkable that even the OECD in its report
“Towards Global Tax Cooperation” (Report to the 2000 Ministerial Council Meeting and
Recommendations by the Committee on Fiscal Affairs, Progress in Identifying and Eliminating
Harmful Tax Practices, Paris 2002, p. 14) which explicitly refers to the Greek tonnage tax of
Law 27/1975 and to the tax regime of Establishments of Law 89 as harmful tax practices, rec-
ognise (in footnote 10) the peculiarity of shipping business and the need to take into account
those particularities.
288 georgios matsos

tax incentives in order to attract Greek-owned ships under the Greek flag,
regardless of whether they fly the Greek flag or not.
The difficulty for all states around the world in retaining shipping business
in their territory and, moreover, having vessels active in the international
transportation of goods registered under their national flag is shown by the
fact that in Greece, in 2008, still after 69 years of tonnage tax, 55 years after
Law Decree 2687/1953, 41 years after Law 89/67, 33 years after the entry in
force of the current Constitution which gives the tonnage tax system consti-
tutional rank and over 50 years of tax treaty policy which allows tax mobility
just by changing the registration port and the ship’s flag, only approximately
25% of the registered tonnage owned by Greek nationals is registered under
the Greek flag, the rest using flags of convenience the power of attraction of
which remains finally irresistible.
This attitude shows that, though the tonnage tax system is a conditio sine
qua non for shipowners to register their ships under a flag other than a flag of
convenience, it is far from an adequate condition for doing so. Thus, it is dif-
ficult to state that taxation of the shipping business is a major factor distorting
competition. The real incentive to use or not use a flag should be finally sought
in other areas, beyond taxation. World competition in the specific area is
extremely demanding and the “flags of convenience” are still more competi-
tive, despite the introduction of a very attractive tax system.
If someone considers how advantageous the Greek legal and tax framework
for the shipping business is, not only in terms of material tax law, but also in
terms of procedural guarantees (constitutional protection of the legislation),
then it becomes clear that, even for the EU countries which have not yet
adopted any tonnage tax system, the introduction of a tonnage tax system is
only an elementary but still inadequate prerequisite for the development of
international shipping business.
The European Commission’s attitude of examining national tonnage tax
regimes under a “traditional” EC-law view on state aid is to be regarded as a
“childhood illness” of Europe in the shipping industry; the Commission
started focusing on the tax regime of the shipping industry only in the last few
years and has not yet learned the hard rules of this game. Sooner or later the
Commission will understand that the shipping industry should not be treated
in the same way as other branches of economy. Forcing the Member States to
review advantageous tax regimes for the shipping industry would only damage
the European economy in this area, by forcing an important part of this activ-
ity outside the EU. It can thus do good for Europe only if the Commission
recovers from such “childhood illnesses” sooner rather than later.
For this purpose, it can profit from the rich Greek experience – I would
dare to call it “old Greek wisdom”, if I were not myself a Greek. Greece and all
 tonnage tax and tax competition 289

other Member States adopting advantageous tax regimes would have no rea-
son to abandon tax income if they could enforce the legitimate goal of taxing
all economic activity taking place in their territory in the same way. The
Commission has to understand that tax incentives in the shipping business do
not distort competition, but restore existing distortions, deriving from the
widespread use of flags of convenience. Unless the phenomenon of flags of
convenience permanently ceases to exist in the future, the Commission has to
accept the current situation and stop damaging the European shipping econ-
omy, just in order to rejoice at the fact that “Europe” dominates the Member
States also in this specific area. The existing state aid rules of EC law are clearly
inapt for application in the international shipping industry.
 MARINE INSURANCE REGIMES AND THEIR IMPACT
ON SHIPPING COMPETITION

Trine-Lise Wilhelmsen*

I. Introduction
II. EU Regulation: Some Starting Points
III. The Economic Theory of the Perfect Contract and its Conditions
1. The Theory of the Perfect Contract
2. The Assumptions of the Perfect Contract
3. Application to the Marine Insurance Regimes
IV. National Mandatory Legislation
V. The Marine Insurance Product
1. The Conditions
2. Some Features of the Regulation of Marine Insurance
A. The Insured Interest and Valuation
B. The Scope of Cover
a) Perils Insured Against
b) Exclusions
c) Causation
C. Duty of Disclosure
D. Duty of Due Care
VI. Attempts at Harmonisation
VII. Summary and Conclusions
1. The National Picture
2. The International Picture: Free Movement of Insurance Services

I. Introduction

The purpose of this chapter is to discuss the extent to which the regulation
of marine insurance in different European countries encourages or dis-
courages the attainment of perfect competition in the marine insurance
market. Since this seminar is focused mainly on the shipping business, the
discussion here relates to hull insurance. I will approach the issue by dis-
cussing the various insurance regimes in the context of economic efficiency.
Since economic efficiency is the goal of perfect competition, this approach
will also describe the effect of the various regimes on competition in
shipping.

* Professor, Scandinavian Institute of Maritime Law, Faculty of Law, University of Oslo.

 marine insurance regimes and their impact 291

The framework for the discussion is a theory in law and economics known
as the theory of the perfect contract. However, the framework will also include
some aspects of the EU’s regulation of competition. Although it is not the
intention here to discuss these rules in detail, some basic features of the regula-
tion are outlined in section 2 as background to the legislative position in rela-
tion to marine insurance. Thereafter section 3 describes the theory of the
perfect contract. A major issue raised in the context of this theory is the extent
to which legislation is mandatory: this issue of mandatory legislation is dis-
cussed in relation to marine insurance in section 4. Section 5 discusses the
marine insurance product in different countries in order to shed light on two
other important issues, both in relation to the theory of the perfect contract
and in relation to EU law: namely the question of transaction costs and the
issue of cooperation among companies.
The discussion covers the marine insurance regimes in Norway, Denmark,
Sweden, Finland, the United Kingdom, Germany, Belgium, France, Spain,
Italy and Greece.1
The material on which this chapter is based has been gathered mainly
through my work in the CMI’s working group on the harmonisation of marine
insurance clauses. This means that some of the information has been gathered
from questionnaires sent by the CMI to the various Member States, rather
than by studying the provisions themselves.2 This is particularly true in rela-
tion to national insurance legislation, which is often not translated into
English. Most of the insurance policies, on the other hand, have been trans-
lated and have therefore been consulted directly.

II. EU Regulation: Some Starting Points

The starting point when considering EU regulation of marine insurance is

that insurance is defined as a financial service and, accordingly, Articles 49
et seq of the EU Treaty apply. Further, the rules on the right of establishment

1
According to 2007 CEFOR Statistics – Part 2, these countries effect hull insurance for ca 55 %
of the marine hull premium in the world, jfr. http://www.cefor.no/statistics/statistics.htm.
2
The full analysis of this material is found in Wilhelmsen, “The marine insurance system in
Civil Law Countries - Status and problems”, in: MarIus no. 242 (1998), p. 15 et seq, “Issues of
marine insurance (Wilhelmsen 1998). Duty of disclosure, duty of good faith, alteration of risk
and warranties in the civil law countries”, in: SIMPLY Scandinavian Institute Yearbook of
maritime law 2000, pp. 239–292. “Issues of marine insurance. Duty of disclosure, duty of good
faith, alteration of risk and warranties”, in: SIMPLY Scandinavian Institute Yearbook of mari-
time law 2001, pp. 41–169, CMI Yearbook 2000 Singapore I, “Issues of marine insurance.
Misconduct of the assured and identification”, SIMPLY Scandinavian Institute Yearbook of
maritime law 2002, pp. 117–172.
292 trine-lise wilhelmsen

in Articles 43 et seq of the Treaty apply to insurance. Articles 43 and 48 pre-

sume a gradual reduction of restrictions which may prevent free establishment
and free movement of services throughout the Union. In addition, several
directives have been implemented with the aim of securing free establishment
of insurance companies and free movement of insurance services.3 However,
these rules have few implications for insurance contract law. Until 1980, the
EU had plans to harmonise legislation governing insurance contracts,4 but it
proved difficult to obtain agreement between the Member States.5 Instead, the
insurance directives contain rules on choice of law in insurance. However,
these rules are not mandatory in relation to the insurance of ocean-going
ships.6 Some directives apply to insurance contracts, but not marine insurance
contracts. This implies that the Member States and insurance companies are
free to regulate marine insurance within the ordinary framework of EU com-
petition law.7
Agreements between insurance companies which limit or prevent competi-
tion, or which may influence trade between Member States are prohibited, cf.
Article 81(1) of the EU Treaty. However, in 1991, the Council provided the
Commission with the authority to declare that Article 81(1) (previously
85(1)) shall not apply to certain categories of agreements between insurance
companies, decisions of associations of insurance companies and concerted
practices in the insurance sector, which have as their object cooperation with
respect to, inter alia, the establishment of common standard policy conditions
and the common coverage of certain types of risk.8 Any regulation adopted
pursuant to this provision must be of limited duration.9 The Commission has
used this opportunity to provide a group exemption for these kinds of agree-
ments.10 The presumption is that collaboration between insurance companies
goes beyond the type of collaboration the Commission has permitted in its
notice concerning cooperation between enterprises, and is caught by the pro-
hibition in Article 81(1).11 The exemption applies to agreements, decisions

3
Directives 73/239/EEC, 88/357/EEC and 92/49/EEC on casualty insurance, cf. Bull,
Innføring i forsikringsrett. 9th edn. Oslo, 2003, pp. 67–68.
4
Draft directive “on the coordination of laws, regulations and administrative provisions
relating to insurance contracts” 1979, and revised draft 1980.
5
Bull, op. cit., p. 69.
6
Directive 88/357, Articles 7 and 8, Directive 92/49 Article 27 and the Norwegian act on
choice of law in insurance § 9 (a) first subparagraph.
7
According to the decision in Case 45/85 Verband der Sachversicherer v. Commission, the
competition rules in the EC Treaty also apply to insurance companies.
8
Council Regulation (EEC) No 1534/91 Article 1, 1 letters (b) and (c).
9
Ibid. Art 1, 2 (b).
10
Commission Regulation (EEC) 3932/92.
11
Ibid. Preamble, recital 3.
 marine insurance regimes and their impact 293

and concerted practices which have as their object the establishment and
distribution of standard policies for direct insurance. The regulation lists sev-
eral conditions which must be satisfied in order for the exemption to apply,
inter alia, that the standard conditions are accompanied by an explicit state-
ment to the effect that they are purely illustrative and that different conditions
may be agreed.12 It follows from this that standard agreements in marine
insurance are permitted within the conditions of this group exemption.

III. The Economic Theory of the Perfect Contract

and its Conditions

1. The Theory of the Perfect Contract

This section of the chapter will establish the relationship between freedom of
contract and the perfectly competitive market. The starting points for this
analysis are welfare economics and the goals of private and social allocation
efficiency. The framework used is Cooter and Ulen’s theory of the perfect
contract.13 The theory establishes freedom of contract as a prerequisite for a
perfect market, but also defines the limitations of this relationship and situa-
tions where it is necessary to limit the freedom of contract.
The perfect contract is a contract enabling the parties to it to achieve their
private economic goals. This theory of the perfect contract combines the use
of a contract as a legal instrument with the micro-economic theory of rational
decision-making. The analytical method is the same as that employed for ana-
lysing the perfectly competitive market: the identification of the assumptions
under which the contract is perfect. If the contract is perfect, it is defined as
being consistent with economic efficiency, and consequently it is not efficient
to refuse to enforce it. On the other hand, if the assumptions for the existence
of a perfect contract are not fulfilled, it is not inconsistent with economic
efficiency to refuse enforcement.
Micro-economic theory focuses on choices arising in immediate transac-
tions. For example, should the decision-maker purchase an apple or a newspa-
per? In the theory of rational decision-making a legally binding promise is

12
Ibid. Articles 5 and 6 (1) (a) and (b). Further, the exemption shall not apply in cases where
the conditions contain clauses as listed in Article 7.
13
Cooter & Ulen, Law and Economics, 2000 p. 229 ff., 2004 p. 195 et seq, Wilhelmsen,
Fairness and Efficiency under Section 36 of the Nordic Contract Acts, in Law and Economics:
Methodology and Application, pp. 34 et seq., idem, Section 36 of the Nordic Contract Acts in
an Economic Perspective, in Dahl/Nielsen (ed), New Directions in Business Law Research,
pp. 121–123.
294 trine-lise wilhelmsen

unnecessary, because the purchase will occur immediately. But if the exchange
involves the passage of time for completion – i.e., the exchange is deferred –
then a legally binding promise is required to ensure the enforceability of the
exchange. Promises are prospective; they are meant to limit the promisor’s
actions in the future. Rational decision-makers willingly promise to limit their
future actions when the expected benefit of so doing exceeds the expected
costs.14
One of the main conclusions of welfare economics is that a perfectly com-
petitive market is socially optimal because it is efficient with respect to both
the production of goods and their allocation to consumers. This is the familiar
concept of “Pareto efficiency”. Cooter and Ulen extend this result to contract
law by stating that a perfectly competitive market results in perfect contracts,
and that a perfect contract by definition is efficient – i.e. Pareto efficient – and
should be strictly enforced according to its terms.
The argument is as follows: if it is possible to revise a contract so that at
least one party is better off and the other parties are not worse off, then the
contract is inefficient. On the other hand, if such a revision is impossible,
then the contract is efficient, i.e., Pareto efficient. Perfect contracts are
complete: every contingency has been anticipated; the associated risk has
been efficiently allocated between the parties; all relevant information has
been communicated; nothing can go wrong. A perfect contract is also effi-
cient: each resource has been allocated to the party who values it the most
and each risk has been allocated to the party who can bear it at least cost.
The terms of the contract exhaust the possibilities for cooperation between
the parties.15
If the parties have negotiated a perfect contract, the contract will have no
failures, so the parties will not require recourse to a court to interpret its terms.
The parties to a perfect contract need the State to enforce their agreement
according to its terms, but nothing more is required of the State.16
In the same way that few markets achieve the ideal of perfect competition,
promises seldom achieve the ideal of the perfect contract. The model of
perfect competition is constructed from a set of assumptions about the struc-
ture of the market and the conduct of its participants. If these assumptions
are satisfied, then the market is efficient. But if the market does not satisfy
these assumptions, then it is usually inefficient. The term “market failure”
describes a situation in which a market departs so far from the assumptions

14
Cooter & Ulen (2004), op. cit., p. 196.
15
Ibid., p. 218.
16
Ibid., p. 218.
 marine insurance regimes and their impact 295

described above that its performance is impaired. By determining which of

the assumptions have been violated, the cause of the market failure can be
identified and measures effected to remedy it.17

2. The Assumptions of the Perfect Contract

According to the Coase Theorem, rational parties will draft a perfect contract
when transaction costs are zero. When transaction costs are zero, the contract
will be complete because negotiating additional terms costs nothing. Given
a perfect contract, State regulation which discards or modifies terms will create
inefficiencies. In general, regulation of contract terms negotiated by rational
people under zero transaction costs causes inefficiencies.18
Conversely, contracts are imperfect when the parties are irrational or trans-
action costs are positive. The assumption of rationality is less important in the
marine insurance sector where the parties are generally highly professional.
However, the assumption of rationality includes an assumption of voluntary
exchange. Economic theory assumes that the decision-maker, within the con-
straint of his budget or income, has freedom to choose which transactions he
wishes to enter into. When freedom of choice is limited, there is a contract
failure.19 This part of the assumption of rationality is closely connected to the
concept that monopoly constitutes a market failure, as described below.
On the other hand, the assumption concerning the absence of transaction
costs is relevant. Making a contract involves searching for parties, negotiating
terms, drafting the contract, and enforcing it. Searching takes effort, negotia-
tions takes time, drafting takes expertise and enforcement takes perseverance.
In many contracts, these transaction costs are small relative to the benefits of
cooperation. In other cases, the transaction costs will be large relative to the
benefits generated through contractual cooperation and will sometimes be
sufficiently large to preclude cooperation.
The theory distinguishes three kinds of obstacles to efficiency which arise
when transaction costs obstruct bargaining. The first obstacle is called spill-
over, which means that the contract has third-party effects that are not included
in the negotiations between the parties and therefore not included in the
transaction costs. This can be compared to external costs which cause the
individual’s self interest to diverge from social efficiency. An example of spill-
over relevant in our context would be contracts between companies not to

17
Ibid., p. 218.
18
Ibid., p. 218 and pp. 44–45.
19
Cooter & Ulen (2000), op. cit., pp. 234 and 241, Cooter & Ulen (2004), ibid., p. 219 and
pp. 44–45.
296 trine-lise wilhelmsen

compete with each other. This type of obstacle to efficiency is consistent with
the prohibition against cartels in the EU Treaty.20
Closely related to spillover are monopolies which are created because high
transaction costs or other barriers prevent alternative sellers from compet-
ing. Competitive markets contain enough buyers and sellers to allow each
person many alternative trading partners. In contrast, oligopoly limits the
available trading partners to a small number, while monopoly limits the
available trading partners to a single seller.21 Monopoly also represents an
obstacle to efficiency because it is inconsistent with the theory’s assumption
of individual rationality, as the presence of monopoly power undermines
the condition that a promise must be voluntary in order for it to be
enforceable.22
A third obstacle which arises in relation to transaction costs is asymmetric
information.23 In the competitive model, full information means information
about the price and quality of the goods. When forming a contract, lack of
information about the terms or consequences of the contract can constitute a
contract failure.24 In the insurance market, the insurance contract is the “prod-
uct”. If the buyer of insurance has the same information about the product as
the seller, there is no asymmetry of information. On the other hand, if the
buyer has less information about the product, the information will be asym-
metric. In general, ignorance is rational when the cost of acquiring informa-
tion exceeds the expected benefit from being informed.25 Accordingly, if the
buyer’s cost of defining the content of the insurance product is high, there is
a risk of asymmetric information in which the buyer lacks full information.
This may constitute a contract failure.

3. Application to the Marine Insurance Regimes

It follows from the theory of the perfect contract that the parties in a perfect
market will enter into perfect contracts and that these contracts will conform
to economic efficiency. In a perfect market, freedom of contract should there-
fore be the rule. Mandatory regulation of contracts may prevent some people
from maximising their benefits, even though others are not making a corre-
sponding gain.26 This may be illustrated by the following example:

20
Cooter & Ulen (2004), op. cit., p. 220.
21
Ibid., p. 223.
22
Cooter & Ulen (2000), op. cit., pp 235–236.
23
Cooter & Ulen (2004), op. cit., p. 221.
24
Cooter & Ulen (2000), op. cit., pp. 235–241.
25
Cooter & Ulen (2004), op. cit., p. 221.
26
Wilhelmsen, Rett i havn, Oslo, 2007, p. 316.
 marine insurance regimes and their impact 297

The insurer will calculate a premium which includes all the costs inherent
in the insurance product. This includes the risk involved. A narrow scope of
coverage will involve a lower premium, whereas a broad scope of coverage will
raise the premium. Similarly, rules for the protection of the assured in relation
to his own acts (disclosure, negligence etc.) will raise the premium, whereas
provisions which exclude casualties caused by negligence etc. will transfer
more risk to the buyer and result in a lower premium. The buyer of insurance
will also calculate the risk in the insurance contract. However, different buyers
will calculate the risks involved differently and they may also calculate the
risks differently from the insurer. This is because buyers will have different
attitudes to risk and thus different needs for various levels of protection. One
buyer may be willing to pay more for insurance in order to get a higher mon-
etary amount of coverage or broader protection, whereas another less risk-
averse buyer may be willing to accept a higher risk in exchange for a reduced
premium. If the content of the insurance is determined by mandatory regula-
tion, the less risk-averse or more risk loving buyer will not be able to buy
insurance corresponding to his needs. If the legislation is discretionary, less
risk-averse buyers will be better off. At the same time, a more risk-averse per-
son will be able to keep his preferred level of protection by obtaining a policy
which adheres to the provisions of the legislation.
An analysis of the extent to which mandatory legislation applies to marine
insurance is therefore useful in studying the potential obstacles to the perfect
contract, as discussed in section 4 below. However, a contract is only perfect
if there is no contract failure due to transaction costs or lack of rationality due
to barriers to the making of a voluntary choice. In order to shed light on
potential contractual failures in the form of spillover costs, monopoly and
asymmetric information, it is necessary to examine how marine insurance
contracts are produced in different systems and the content of the product, as
discussed in section 5 below.

IV. National Mandatory Legislation

All the civil law countries appear to have some sort of public legislation con-
cerning insurance contracts, either incorporated into a more general commer-
cial act or in the form of an act specifically applicable to insurance contracts.
In most of these countries, however, this legislation is mostly either discretion-
ary in its application to marine insurance in general or discretionary in general
subject to a few exceptions.
The four Scandinavian countries previously had a common Insurance
Contract Act (ICA), dating from around 1930. This Act was discretionary
unless there was provision to the contrary, but contained several mandatory
298 trine-lise wilhelmsen

rules which also applied to marine insurance. This Act still applies in Denmark,
although it was amended in 2003.27 The other three Scandinavian countries
have new ICAs.28 The approach in Norway, Sweden and Finland is that
insurance regulation is generally mandatory, but marine insurance is excluded.29
Accordingly, in Norway, Sweden and Finland there is full contractual freedom
in relation to hull insurance.
The Danish ICA contains general provisions which apply to all kinds of
insurance as well as separate provisions applicable to marine insurance. The
latter provisions are not mandatory and in little use, as these rules are con-
tained in the more specific Danish Marine Insurance Convention, as discussed
below. The mandatory application of the Act includes the duty of disclosure,30
increase of risk,31 safety regulation,32 the insurer’s right of sanction against an
assured who breaches his duties concerning the insured event,33 the concept of
insurable interest,34 negligence of the assured,35 and valuation.36
The Scandinavian legislation also contains a common rule concerning
unfair contracts, stating that contracts which provide for unfair results may be
set aside partly or in full.37 This rule is mandatory and applies also to profes-
sional contracts.
France has a general Insurance Contracts Act (ICA)38 which deals with
marine insurance in chapter VII. The French ICA contains some mandatory
rules, but the number of mandatory rules is limited due to the international
character of marine insurance. There are, however, general mandatory rules
concerning, inter alia, insurable interest, duty of disclosure, duty of disclosure

27
Danish Insurance Contracts Act dated 15 April 1930 (Danish ICA), as amended by Act
no. 434 10 June 2003 and Act. no. 451 9 June 2004.
28
Norwegian Insurance Contracts Act (Norwegian ICA) dated 16 June 1989, Swedish
Insurance Contracts Act 2005:104 (Swedish ICA), Finnish Insurance Contracts Act 28 June
1994 (Finnish ICA).
29
Norwegian ICA sections 1–3, excluding insurance in relation to ships that have to be
registered according to the Maritime Code of 24 June 1994, Swedish ICA chapter 1 § 6 cf. § 7
excluding commercial marine insurance, and Finnish ICA § 3 third subparagraph, excluding
commercial marine insurance.
30
Danish ICA § 10 ref. § 5, 7, 8 and 9.
31
Danish ICA § 50 ref. §§ 45–49.
32
Danish ICA § 51.
33
Danish ICA § 23 cf. §§ 22–21.
34
Danish ICA § 35.
35
Danish ICA § 20.
36
Danish ICA § 39.
37
Norsk avtalelov av 31. mai 1918 nr. 4 § 36, dansk Lov om aftaler og andre retshandler på
formuerettens område, Lovbog nr. 600 af 8. september 1986 § 36, svensk Lag om avtal och
andra rättshandlingar på förmögenhetsrättens område (1915:218) § 36, finsk Lag om rättshand-
linger på förmögenhetsrättens område (1982/956) § 36.
38
Loi no 67–522 du 3 juillet 1967 sur les assurances maritime. This legislation is not trans-
lated into English and so information about the rules has been obtained from the CMI
questionnaires.
 marine insurance regimes and their impact 299

in the case of alteration of risk, fraud regarding the insured value, and obliga-
tion of good faith in the declaration of the insured event.39 In addition there
are mandatory rules applying to marine insurance concerning wilful miscon-
duct and gross negligence.40
In Germany, a general Insurance Contracts Act dates from 1908,41 but this
Act does not contain provisions applicable to marine insurance. The previous
German administration proposed a draft reform of this Act which will also
apply to marine insurance, but the parties will still be able to contract out of its
provisions.42 In addition, the German Commercial Code contains legislation on
marine insurance.43 This legislation is discretionary and in practice is no longer
applied. Apparently, the rules of the Commercial Code have been replaced in
practice by Standard Insurance Conditions which were introduced into the
German Marine Insurance Market in 1919, as described in more detail below.
The Belgian Maritime Code (MC) contains special provisions applicable to
marine insurance44 which are complementary to the general Insurance Law.45
Both the 1874 Insurance Law and the provisions of the MC are discretionary
in relation to marine insurance.
In Greece, rules on insurance contracts were incorporated in the Commercial
Code until 1997. The relevant provisions of the Commercial Code have now
been superseded by Law 2496/1997. In addition, the Greek Code of Private
Maritime Law of 1958 (CPML), chapter 14, contains special provisions appli-
cable to marine insurance. According to section 257 of the CPML, sections 189
to 225 of the Commercial Code also apply to marine insurance, unless they are
incompatible with the nature of marine insurance and insofar as they are not
modified by the specific provisions of the CPML. As mentioned, the Commercial
Code has been replaced by Law 2496/1997. The provisions in the CPML are
mostly discretionary, although there are some mandatory provisions.
Under Italian law, sections 1882 to 1932 of the Civil Code (Italian CC)
regulate insurance contracts. According to section 1885, these provisions also
apply to marine insurance insofar as marine insurance is not governed by the
Code of Navigation (C Nav).46 Apparently, the insurance provisions of the

39
Article L 171–3, L 172–2, L 172–3, L 172–6 and L 172–28, cf. CMI questionnaire.
40
Art. L 172–13, cf. CMI questionnaire.
41
VVG, or Versicherungsvertragsgesetz, cf. CMI questionnaire.
42
CMI Yearbook 2005/2006 p. 389.
43
HGB, or Handelsgesetzbuch section 778–900.
44
VI “Assurances Maritimes”, articles 191 to 250, cf. information from the CMI question-
naire. The legislation is not translated into English.
45
Dated 1l th June 1874 (1874 Insurance Law).
46
This material is from the CMI questionnaires, cf. further Wilhelmsen (2001), op. cit.,
p. 50–51. A translation of the rules was provided, but not the date of the legislation.
300 trine-lise wilhelmsen

CC have the status of special rules of maritime law and apply to marine
insurance unless the C Nav specifically provides otherwise. The C Nav con-
tains a section relating to marine insurance (Articles 514–547).
As a starting point, the Italian CC is discretionary, but some rules are man-
datory. These include, inter alia, those applicable to the duty of disclosure, the
alteration of risk, and the duty to salvage property, with the related right to
compensation for salvage.47
In Spain, marine insurance is regulated by the Spanish Code of Com-
merce (C Com) of 1885 (sections 737–805). Provisions applicable to marine
insurance are also found in the Spanish Insurance Contract Act (Spanish ICA),
but the application of this Act is not mandatory in the case of large risks,
including marine exposures.48 As the application of the C Com, as a starting
point, is not mandatory at all, this means that the parties to the contract are
free to depart from the legislative regulation. However, there are some rules
which are mandatory, including those concerning the concept of indemnity
and good faith.
The Spanish ICA is a very consumer-friendly piece of legislation, in sharp
contrast to the Spanish C Com and the commercial contractual conditions.
These differences between the two pieces of legislation and between the legis-
lation and commercial contractual solutions seem to have caused some prob-
lems and the legislation is in the course of being revised. A draft Marine
Insurance Act has been prepared under the auspices of the Spanish Maritime
Law Association and has been submitted to the “Commission de Codificación”
(Codified Legislation Committee) for further analysis.
The statutory basis for marine insurance law in the United Kingdom is
the Marine Insurance Act 1906 (UK MIA) which sought to codify pre-
existing common law relating to marine insurance. By 1901, it was esti-
mated that over 2,000 reported court cases dealt with issues of marine
insurance. This judicial precedent and numerous market practices are
reflected in the 1906 Act.
The UK MIA contains no specific provision stating whether or not its
application is mandatory. Accordingly, each clause must be considered
individually to establish whether its application is mandatory. Some clauses
contain definitions and thus may not be departed from, while the interpreta-
tion of others shows their application to be mandatory. However, some of
the provisions of the UK MIA apply only “subject to any express provision in
the policy” or “unless the policy otherwise provides”. If so, the parties are free
to depart from these particular provisions.

47
Italian CC article 1932 cf. 1892, 1893, 1897, 1898, 1914 and 1915.
48
Ley del contrato de seguro of 1980, sects. 44.2 and 107.2, cf. CMI questionnaire.
 marine insurance regimes and their impact 301

V. The Marine Insurance Product

1. The Conditions
Section 4 above has demonstrated that, except for a few mandatory provisions
in some countries, marine insurance is subject to substantial commercial free-
dom. This contractual freedom is mainly used to establish standard contract
forms regulating marine insurance conditions in each country. However, the
manner in which these standard contracts are drafted and structured varies
among the different countries.
In Norway, marine insurance is regulated commercially by the Norwegian
Marine Insurance Plan (NMIP) 1996, version 2007.49 The NMIP provides all
rules relevant for marine insurance, both general rules and rules relating to
specific types of marine insurance. Consequently, the Norwegian ICA plays only
a minor role as background legislation, if any. As the NMIP is continually
amended by a permanent revision committee, supplementary conditions are not
necessary. The NMIP is drafted by a broad committee on which all interested
parties are represented, i.e. the insurers, the assureds and the average adjuster.50
In Sweden, hull insurance is regulated commercially through a combination
of a General Marine Insurance Plan (SP)51 and the Swedish Hull Conditions
(SHC).52 The SP contains general provisions and special conditions applicable
to, inter alia, hull insurance. The SP is, however, promulgated by the insurers
with no participation by the assureds; accordingly, the SP tends to favour the
insurers more than does the NMIP. Therefore, important parts of the SP are
replaced by the SHC, which is a set of standard conditions agreed between the
interested parties.53 The SHC contains both specific rules relating to hull
insurance and more general provisions relating to the duty of disclosure and
due care. Although the rules are similar to, but not identical with, the NMIP,
the structure is very different.
In Denmark, the commercial conditions for marine insurance are incorpo-
rated into the Danish Marine Insurance Convention (DC).54 The DC contains

49
Introduced in 1871 with amendments in 1881, 1894, 1907, 1930, 1964 and 1996, cf.
Wilhelmsen & Bull, Handbook in marine insurance, Oslo, 2007, pp. 28 et seq and Wilhelmsen
(1998), op. cit., pp. 18 et seq.
50
An overview of the parties that participated in the drafting can be found in Preface of the
NMIP 1996 Version 2007, cf. http://www.norwegianplan.no.
51
The first SP was introduced in 1891. It was revised in 1896 and 1957, cf. Wilhelmsen
(1998), op. cit., p. 21.
52
Introduced in 1966, revised in 1976, 1987 and 2000.
53
The Swedish Club, the Central Union of Marine Underwriters, the Swedish Shipowners’
Association and the Average Adjuster.
54
Introduced 2 April 1850, amended 1934.
302 trine-lise wilhelmsen

both general provisions and special conditions for hull insurance. As was the
Norwegian Plan, the Danish Convention was drafted by a Committee con-
sisting of members of the organisations involved.55 The Danish Convention is
supplemented rather extensively by conditions developed in the market and
there is a set of conditions for hull insurance recommended by the Danish
Central Union of Marine Underwriters. These conditions address both gen-
eral questions and special regulations for Hull insurance.
Both the Swedish and the Danish Shipowners’ Associations are discussing
cooperation with the Norwegian Shipowners’ Association in order to use the
NMIP as a common standard contract.
Finland does not have a Plan or Convention, but industry associations have
recently produced a set of agreed standard Finnish Marine Hull Insurance
conditions.56 As with the Swedish conditions, the standard Finnish conditions
are influenced by the NMIP, but the structure and details vary.
Marine insurance is currently commercially regulated in Germany by the
German General Rules of Marine Insurance, also known as the ADS.57 The ADS
contains both general provisions concerning, for instance, insurable interest and
value, duties of the assured, premiums and also special rules on, inter alia, hull
insurance. An amendment to the ADS in 1978 resulted in the Deutscher
Transport-Versicherungs-Verband eV (DTV) Hull Clauses 1978. These DTV
Hull Clauses replaced previous Hull Clauses in the German market, but did not
lead to any alteration in the original ADS concerning hull insurance.58
The UK market for hull insurance is today divided between Lloyd’s and
several ordinary insurance companies,59 but alll effect insurance on identical
conditions. The main set of insurance clauses concerning hull insurance for
ocean-going ships is the Institute Times Clauses (Hulls) (ITCH). Apparently,
75 % of the marked is insured on ITCH 1983. These clauses were amended
in 1995, but the 1995 version seems little used.60

55
Assurandør Societetet, Dansk Skipsrederiforening (Danish Shipowners’ Union), Foreningen
av Danske Sjøassurandører (Danish Union of Marine Underwriters), and Grosserer-Societetets
Komité.
56
Finnish Marine Hull Insurance Conditions 2001 approved by the Finnish Marine
Underwriters’ Association, The Finnish Shipowners’ Association, the Cargoship Association
and the Aland Shipowners’ Association.
57
The ADS was drafted by the German Marine Underwriters in consultation with the
German Chambers of Commerce and other competent organizations under the leadership of
the Hamburg Chamber of Commerce, and was published in 1919. Particular conditions for
hull insurance were introduced in 1957.
58
The 1978 DTV Hull Clauses were further amended in November 1982. Two later amend-
ments have taken place, first in 1984 and then in 1992. The 1992 amendment, however, only
affected a few clauses.
59
Brækhus & Rein, Håndbok i kaskoforsikring, Oslo 1993, p. 15.
60
Wilhelmsen & Bull, Handbook in hull insurance, Oslo 2007, p. 36.
 marine insurance regimes and their impact 303

In addition to ITCH, the market also offers the new International Hull
Clauses dating from 2002, which were amended in 2003. These clauses were
drafted in order to meet some of the criticisms contained in the CMI’s work
on the harmonisation of marine insurance clauses, which is discussed further
below. These clauses are apparently little used today.
In Belgium, hull insurance is effected on the so-called Corvette Conditions.61
These conditions are combined with other traditional clauses, such as clauses
from the English ITCH and the US Hull Conditions. In France, the general
hull conditions are the “French Marine Hull Insurance Policy for All Vessels”
(French HC).62
In Italy, hull insurance is effected on the “Marine Hull Insurance Form”,63
in combination with the ITCH. The former policy is limited to certain gen-
eral conditions on cover and does not include risks covered and exclusions.
The insurance contract is governed by Italian law, but whenever insurance is
effected subject to English policy conditions, these must be construed and
applied according to English practice.64
The Spanish marine insurance market operates with a combination of
standard marine insurance conditions65 and versions of these conditions
updated by some companies. American, English or Norwegian clauses relat-
ing to, inter alia, hull insurance are often integrated into the policy. The incor-
poration of foreign clauses into the Spanish Marine Insurance Contract causes
serious problems because the various terms of the contract are based on quite
different legal frameworks. It can thus be difficult to find a feasible instrument
to use as a basis for construing the conditions.
There are no national standard conditions for hull insurance in Greece and
hull insurance is effected using the English ITCH clauses.

2. Some Features of the Regulation of Marine Insurance

A detailed analysis of the regulatory regimes contained in the legislative and
commercial regulation applicable to marine insurance lies beyond the scope of
this chapter, which aims merely to highlight some general features of marine
insurance regulation. The purpose of this is to establish how difficult it is to

61
The Corvette Underwriters’ Conditions were developed in the early 1980s. The latest
amendment is from 1999.
62
The original policy form was dated 1 December 1983, and was amended 13 December
1984 and 30 January 1992. These conditions were renewed two years ago and the new policy
was adopted from January 1998.
63
Assitalia Capitolato di assicurazione corpi marittimi edizione 1988.
64
General conditions article 2.
65
Condiciones Generales del Seguro de Buques” for hulls prepared between 1927 and 1934
by the Madrid Marine Insurance Committee.
304 trine-lise wilhelmsen

obtain a full picture of the various standard clauses. This is relevant when assess-
ing information-gathering costs, which are an aspect of transaction costs.
The various regimes tend to regulate the same issues, but it is impossible to
identify any common structure, and the legislative techniques and material
solutions vary. The structure of marine insurance regulation differs in different
countries, both because the structure of the applicable legislation varies and
because the commercial standard forms are drafted differently.

A. The Insured Interest and Valuation

A general requirement in marine insurance is that the insured interest must be
legal and have an economic value. However, techniques for securing this
requirement vary. These principles are often stated in mandatory legislation,66
but may also be defined or further developed in the insurance conditions. A
lack of economic interest will normally result in the contract being void.67 In
relation to an illegal interest, the conditions will provide for various conse-
quences ranging from automatic termination of the insurance if the ship is
used in illegal activities,68 to the exclusion of losses which are caused either by
illegal activity in general69 or by a defined illegal activity,70 to the exclusion of
specific losses caused by specific illegal activities.71 Illegal activities may also be
defined as an alteration of risk, resulting in a combination of the sanctions
described above.72
The marine insurance of ocean-going ships is normally agreed on the basis
of an assessed insurable value. Such an assessed value will, as a starting point,
be binding on the parties to the contract. However, the assessed value may be
set aside by the underwriters in certain instances. The circumstances under
which the assessed value may be challenged, however, differs under the differ-
ent regimes. In some, the underwriters may be entitled to demand a reduction
in the assessed value if it considerably exceeds the real value of the interest.73
In others, the assessed value may be reduced only if the person effecting the

66
Cf, for instance, CPML section 259, Danish ICA § 35, and MIA section 5 concerning
legal interest and Italian CC section 1904 and MIA section 4 concerning economic interest.
67
Cf. Italian CC section 1904, Danish ICA § 35 and MIA section 4, NMIP § 2-1 and ADS
1 (1) and 2 (1).
68
Danish Hull Conditions (DHC) 2.3 no. 5.
69
See SHC § 7.2 (a).
70
See French Marine Hull Insurance Policy (FMHP) article 3, 1, excluding loss caused by
smuggling, forbidden or clandestine trade, and fines.
71
See DHC 4.9, the insurance does not cover fines or confiscation or similar measures against
the ship due to breach of customs, fraud and similar conduct.
72
NMIP § 3–16.
73
ADS 6 (2).
 marine insurance regimes and their impact 305

insurance has given misleading information about relevant characteristics of

the subject-matter of the insurance.74 A third alternative is for the assessed
value to be decisive except in the case of fraud.75 The Greek legislation merely
states that the valuation may not be contested on the grounds of error.76 The
Italian system also recognises assessed valuation in marine insurance.77 It is less
clear, however, to what extent the insurer can claim to set the valuation aside.

B. The Scope of Cover

a) Perils Insured Against
Marine insurance conditions are normally divided into insurance against
marine perils and insurance against war perils. In the civil law countries, insur-
ance against marine perils is based on an all-risks principle, with the starting
point that the insurance will cover all perils to which the interest may be
exposed unless there is a provision to the contrary. Perils covered by insurance
against war perils are then explicitly excluded from the marine peril insur-
ance.78 In the UK, on the other hand, both marine insurance and war insur-
ance are based on the principle of named perils.79
b) Exclusions
Traditionally, marine insurance cover has excluded nuclear risk.80 After the
terrorist attack in New York in September 2001 this exclusion was further
developed in the reinsurance market through the introduction of the so-called
RACE II clause.81 This clause excludes both risk connected to the release of
nuclear energy and risk connected to biological, chemical and biochemical
weapons.82 Because the reinsurance market will not insure these risks, they are
normally specifically excluded in all direct marine insurance policies, even if
not directly incorporated in the standard clauses.

74
See NMIP § 2–3, DC § 10 and SHC § 2.
75
See FMHP 7 first paragraph.
76
Greek CPML section 268 third paragraph.
77
See Italian CC section 1908 second paragraph and C Nav section 515.
78
NMIP § 2–8 and § 2–9, DHC 3.1 ref 4.4, SHC § 5 cf. cf. § 7.2 litra (b) to (e), ADS 28
ref.35 and DTV Hull clauses 16 and 17, FMHP article 1 first paragraph ref. article 3 and
Italian C Nav section 521 with Commentary p. 263 and Mutuamar 1942 1 ref. 5 (b). The all-
risks principle is also expressed in Greek CPML section 269 first paragraph, with a definition
of war risk in section 271.
79
ITCH clause 6, IHC clause 2, Institute War and Strikes Clauses (Hulls) 1/10/83 clause 1.
80
Wilhelmsen (1998), op. cit., p. 38.
81
Wilhelmsen & Bull (2007), op. cit., pp. 103–105, Commentary to Norwegian Marine
Insurance Plan 1996 Version 2007 § 2–8 and § 2–8.
82
NMIP § 2–8 litra (d).
306 trine-lise wilhelmsen

Another general exclusion often included states that the insurance does not
cover loss due to ordinary use.83 The exclusion for damage caused by ordinary
use etc. is a general one. If a casualty caused by ordinary use results in a total
loss, the insurer will therefore not be liable.
A peril similar to ordinary use is wear and tear, but this coverage varies a
great deal. One approach is to exclude damage and loss caused by “wear and
tear”.84 According to this approach, total loss caused by wear and tear is
excluded. A less restrictive approach is that the insurer of the vessel is liable for
losses caused by “latent defect of the vessel, unless he proves that the Insured
could have discovered same by due diligence”.85 The exclusion in the
Scandinavian system is less restrictive, providing the assured with cover for the
greater part of the maintenance risk. The starting point here is that the insurer
is not liable for costs incurred in renewing or repairing part or parts of the ship
that are defective because of wear and tear, corrosion, inadequate maintenance
and the like.86 The result of this is that damage to other parts of the ship as a
consequence of the defective part will be covered. In addition total loss, colli-
sion liability and expenses will be covered in full.
Cover for error in design, faulty materials etc. is generally wider than cover
for insufficient maintenance. The most extensive cover seems to be found in
the German and Italian conditions, implying that damage caused by error in
design and faulty materials will be covered in full.87 The same solution applies
in Sweden and Norway, subject to approval of the damaged part by the clas-
sification society.88 Denmark and Finland, on the other hand, have a very
complicated solution which mainly corresponds to the NMIP 1964, and
which also has several similarities with the solution adopted in the UK.89 The
situation regarding this issue in the UK is extremely complicated and not
particularly clear.90 The main distinguishing feature is that cover is provided
for damage caused by the bursting of boilers and breakage of shafts and any
latent defect in the machinery or hull, but not for the cost of repairing the

83
See, inter alia., NMIP § 10–3, DHC 4.10, SHC § 7 letter (a) ref. SP § 81 litra (a). A simi-
lar exclusion is not necessary in a named peril insurance, because ordinary use is outside the
scope of the listed perils.
84
FMHC art. 3 (1), fourth part, DTV Hull Clauses 27, MIA section 55 letter (c).
85
Italian C Nav section 525 and Italian CC section 1906. The interpretation of this provision
seems somewhat unclear, cf. Wilhelmsen (1998) p. 39. The same holds for FMHP article 3 (1)
fourth part, excluding losses caused by “inherent vice”.
86
NMIP § 12–3, DHC 5.2, SHC clause 7.1 litra (b) no. 1 and FHC section 15.3 1 (a), but
this clause excludes some of the consequential losses.
87
Cf. in more detail, Wilhelmsen (1998), op. cit., p. 40.
88
NMIP §12–4, SHC clause 7.1 letter (b).
89
DHC 5.1 and FHC sec. 15.2 cf. sections 11.3 – 11.6, cf. NMIP 1964 § 175.
90
Cf. Wilhelmsen, Hull insurance of “latent defects”, in Scandinavian Studies in Law, vol. 46,
p. 257 et seq, chapter 5, Wilhelmsen & Bull (2007), op. cit., pp. 267–270.
 marine insurance regimes and their impact 307

boiler, shaft or latent defect itself.91 Additional cover may be agreed to cover
the costs of repairing the boiler/shaft or the cost of correcting the latent defect,
but only if the breakage or defect has caused damage to the ship.92
c) Causation
The main rule concerning causation in the civil law countries is the so-called
dominant cause rule (hovedårsakslæren in Norwegian), which is similar in
approach to the causa proxima rule applied in common law countries.93 This
rule has not been applied in Norway, however, since the adoption of the
NMIP of 1930. Instead, when a loss is caused by a combination of perils,
the loss must be apportioned between the individual perils on the basis of the
influence each peril must be assumed to have had on the occurrence and
extent of the loss.94 Accordingly, the Norwegian position concerning the regu-
lation of a fundamental principle of marine insurance differs substantially
from the position adopted in other countries. The Norwegian provision con-
cerning apportionment does not apply, however, if the loss is caused by a
combination of war perils and marine perils.95 Instead, a modified dominant
cause rule is applied.
It should be mentioned that the dominant cause rule in the German condi-
tions is modified in one instance. If damage is caused by wear and tear in
combination with an insured peril, and the insured peril is not the proximate
cause of the damage, the damage must be apportioned between the different
causes.96

C. Duty of Disclosure
In order to calculate the premium correctly, the insurer needs information
about the risk. The person with the most knowledge about the risk will be the
person effecting the insurance. Consequently, insurance regulation will nor-
mally contain rules on the duty of disclosure. Characteristically, these rules
will impose a duty on the person effecting the insurance to provide the insurer
with full and correct disclosure of all material circumstances.97 The conditions

91
IHC 2.2.1 and 2.2.2, ITCH Additional Perils Clause 1.
92
IHC 41.1.1 and 41.1.2, ITCH Additional Perils Clause 2.
93
Wilhelmsen & Bull (2007), op. cit., pp. 122–127 with references.
94
NMIP § 2–13 and Commentaries to NMIP § 2–13. A principle of apportionment is also
provided for in DTV Hull Clauses 27.2 (combination of wear and tear and insured peril).
95
NMIP § 2–14.
96
DTV Hull Clauses 27.2.
97
NMIP § 3–1 first paragraph, DC § 21, ADS 19 (1), Greek law 2496/1997 § 3, and Italian
CC 1892. According to the Greek provision the assured also has to answer the insurer’s ques-
tions, FMHP art. 8 (1) and SHC clause 9.1, FHC sec. 27.1, MIA sec. 18 and 20.
308 trine-lise wilhelmsen

under which the insurer may invoke breach and impose sanctions are, however,
extremely varied.
The most varied and flexible form of regulation is found in Scandinavia,
where the consequences of a breach of the duty of disclosure vary according to
the insurer’s attitude towards the undisclosed circumstances and the degree
of negligence on the part of the person who effected the insurance. However,
the details vary somewhat between the different Scandinavian countries.98 The
systems in other civil law countries are simpler and apply more strictly. The
general approach seems to be that the most serious types of breach will free
the insurer of liability, while in other cases the assured has to accept a reduc-
tion in the level of cover. A general feature of legislation in these countries is
that causation is no condition for the insurer to invoke the sanctions. There is
some variation, however, with regard to the details of this legislation.99
The duty of disclosure is most strictly regulated under UK law: an insurer
may avoid the contract if the assured fails to disclose a material circumstance
which he knew or ought to have known or if he misrepresents a material
fact.100

D. Duty of Due Care

The level of risk undertaken by the insurer will also depend on the behaviour
of the assured while the insurance period is running. Legislative and commer-
cial regulations of marine insurance therefore contain rules to ensure that the
assured acts with due care in relation to the insured object in order to avoid
casualties. Of special importance currently are rules to prevent the operation
of substandard ships, i.e., to ensure that ships comply with international and
national standards for seaworthiness, safety etc. This is achieved through rules
on the alteration of risk, seaworthiness, safety regulation, warranties and simi-
lar contractual clauses, together with rules concerning the negligence of the
assured.
One set of rules employed in the civil law countries, but not in the UK, are
rules concerning the alteration or increase of risk. The rules regulating
this issue in some countries are very similar to those regulating the duty of

98
FHC section 27.2 to 27–5, NMIP § 3–2 to § 3–4, DC § 22–24, SP § 11 – 13 cf. cf. SHC
clause 9.3 to 9.5
99
Cf. Greek Law 2496/1997 § 3, Italian CC 1892 and 1893, ADS 20 (2) and (1), French
Law no. 67–522, section 6, here referred to from United Nations Conference on Trade and
Development, Marine Insurance, Legal and documentary aspects of the marine insurance con-
tract, Report by the UNCTAD secretariat, 20 November 1978 (TD/B/C.4/ISL/27).
100
MIA sections 18(1) and 20 (1).
 marine insurance regimes and their impact 309

disclosure. In Denmark and Italy, public legislation imposes mandatory

rules.101 The definition of what constitutes an alteration or increase of risk vary,
but basically the rules apply to situations either where the risk is increased
compared to the written or implied conditions of the insurance contract102 or
where the risk is increased in such a way that the insurer would not have
accepted the insurance on the same conditions if he had known about the
increased risk.103 The sanctions are more varied. The simplest sanction is that
the insurer will be free of liability if there is a material or relevant increase in
risk and this affects the casualty or the level of indemnity.104 In the Scandinavian
countries105 and Greece,106 the sanction is very similar to that for breach of the
duty of disclosure. In France, alteration of risk is categorised under the heading
“Disclosure”, and a duty is formulated whereby the assured must notify the
insurer about circumstances affecting the risk as soon as the assured is aware of
such circumstances. Non-compliance with this duty will cause the cancella-
tion of the policy or a proportionate reduction in the level of indemnity.107
In addition to alteration of risk, some civil law countries employ the con-
cepts of seaworthiness and safety regulation. Exclusions for unseaworthiness
apply in Scandinavia, except for in Norway, and in the German and French
standard contractual terms. The main feature of the way this issue is regulated
in Denmark, Sweden, Finland and Germany is that the insurer will not be
liable for loss caused because the ship is not in a seaworthy condition, pro-
vided the assured could have prevented this.108 The Italian approach appears
to be that seaworthiness is regulated through the provisions concerning exclu-
sions for gross negligence,109 i.e., an act or omission by the assured which
causes unseaworthiness is deemed to be grossly negligent and the insurer’s
liability for any resulting casualty is excluded.110
The concept of safety regulation originated in Scandinavia and is little
used in the other civil law countries. Essentially, if the casualty is caused by
a breach of a provision which is defined as a safety regulation in the insur-
ance contract, and the breach is caused by negligence, the insurer is free of

101
Cf. Danish ICA 1930 §§ 45 et seq and Italian CC 1932 cf. 1898 second part.
102
NMIP § 3–8 first paragraph, SHC clause 18 first paragraph cf. SP § 41, FHC section 29
(1), DC § 42. ADS 23 seems to use the same approach, but further defines some circumstances
that constitute an alteration of risk.
103
Italian C Nav section 522 ref. CC 1898, Greek Law 2496/1997 § 4.
104
Italian C Nav section 522 cf. CC 1898, ADS 24 cf. 23 and 26.
105
NMIP § 3–9 to § 3–11, DC §§ 42–44, SHC § 18 cf. SP §§ 41–43, FHC section 30.
106
Greek Law 2496/1997 § 4.
107
FMHP article 8 (2) cf. art. 14 second part.
108
SHC clause 12, DHC 4.5 and FHC section 43.2, DTV Hull Clauses 23.1 and 23.2.
109
Italian C Nav section 524 ref. CC section 1900.
110
See Tribunale Genoa, 31 December 1968, Court of Cassation, 2 March 1973.
310 trine-lise wilhelmsen

liability.111 The concept of safety regulation normally encompasses any meas-

ure for the prevention of loss issued by public authorities, the classification
societies or the insurer,112 but it may also be limited to requirements imposed
by public authorities.113
Unlike the civil law countries, which use the concepts of alteration of risk,
seaworthiness and safety regulation, the UK employs the concept of warran-
ties. A warranty is a guarantee from the assured which must be exactly com-
plied with.114 If the assured fails to comply with the warranty, the insurance
contract will be terminated regardless of fault on the part of the assured
and of whether there is any causal link between the failure and the casualty.
The standard contract terms in the UK employ this concept to regulate loss
of class, change of classification society, and change of flag, ownership or
management.115
Some of these issues are regulated fairly similarly in the civil law countries.
Loss of class is treated this way in several countries,116 although the approach to
establishing the principle differs.117 Change of classification society may be
treated similarly,118 but also as an increase of risk.119 Non-compliance with
periodic surveys is normally treated as a safety measure,120 or as part of the regu-
lation of seaworthiness.121
Change of ownership will normally result in automatic termination of the
insurance.122 This may also apply to a change of flag or management,123 but
these changes are also regulated as an increase of risk,124 or through rules on
notification and cancellation.125

111
NMIP § 3–22 and 3–23 cf. 3–25, SHC clause 11, FHC section 44 cf. section 45, DHC
4.7 cf. DC § 49.
112
NMIP § 3–22, FHC sec. 44.1, SHC clause 11.1.
113
DHC 4.7 cf. DC § 49.
114
MIA section 33, cf. Wilhelmsen: (2001) p. 129 et seq.
115
ITCH clause 4, IHC clauses 13 and 14, which also include compliance with conditions
from the Classification Society and the holding of a SOLAS certificate.
116
NMIP article 3–14 second paragraph, DHC article 2.3 (1), FHC sec. 33.2, SHC clause
11.1 cf. cf. clause 4 second paragraph.
117
Wilhelmsen (1998), op. cit., p. 49 et seq and (2001), op. cit., p. 141 et seq.
118
FHC sec. 32.2, SHC clause 4 second subparagraph.
119
NMIP § 3–8, and similarly FMHP art. 8 (3) cf. art. 14 second part.
120
NMIP § 3–22 second paragraph, SHC clause 11.1, FHC section 44.2.
121
DTV Hull Clauses 23.1 and 23.2.
122
DTV Hull Clauses 13, DHC 2.3.4, NMIP 3–21, SHC clause 4 first subparagraph, FHC
section 32 and FMHP article 17 eighth and ninth paragraph.
123
DHC 2.3.2 and 2.3.3. It may be argued that this regulation is contrary to the mandatory
provisions in the Danish ICA, but the clauses may be defended if they are defined as a relevant
increase of risk.
124
NMIP § 3–8 second paragraph and FHC section 38 (change of manager).
125
DTV Hull Clauses 12.1, 12.2 and 12.5 (change of management), FMHP article 8 nos.
3 and 14 (change of flag).
 marine insurance regimes and their impact 311

The last example of insurance regulation I will mention here concerns loss
caused by the insured. The usual starting point is that the insurer will not be
liable for loss caused by wilful misconduct and/or with intent.126 In France,
Italy, Sweden and Greece, this exclusion also applies in respect of loss caused
by gross negligence,127 whereas the German standard contract terms gener-
ally exclude loss caused by negligence.128 In Norway, Denmark and Finland,
there is no absolute exclusion for gross negligence, but rather a reduction in
the level of indemnity depending on the degree of fault and other circum-
stances in general.129
In the case of loss caused by ordinary negligence, the insurer is thus liable
in full according to the Scandinavian, French and Italian rules. In Denmark,
this rule is mandatory, see § 20 of the Danish ICA 1930.
In the UK, exclusions for negligence or gross negligence are less important
due to the named perils principle. However, some of the listed perils are cov-
ered “provided such loss or damage has not resulted from want of due dili-
gence by the assured.”130

VI. Attempts at Harmonisation

The above clearly demonstrates the great complexity of marine insurance reg-
ulation in terms of both structure and the legal approach taken to the different
issues, as well as in its details. It is also clear that the legislative and commercial
regulation in the UK is in several ways much more to the disadvantage of the
assured than in the civil law countries. This is not a new phenomenon and
several attempts have been made to harmonise the rules.
One attempt was made by UNCTAD in the period from 1975 to 1989.
A report from the UNCTAD Secretariat in 1975 voiced criticism of some of
the material solutions found in leading international insurance standard

126
Italian CC section 1900, NMIP 3–32, DC § 67 first paragraph, SHC clause 13 cf. SP §
40 first paragraph, FHC sec. 42.1, FMHP art. 3 third part, ADS 33, Greek Law 2496/1997 §
7 fifth paragraph, and MIA section 55 (2) (a).
127
Italian CC 1900, FMHP art. 3 third part, SHC clause 13 and Greek Law 2496/1997 § 7
fifth paragraph. In the Greek regulation, however, if there is third-party liability insurance,
the insurer is relieved from liability only if the insured acted wilfully, see Greek Law 2496/1997
§ 25.
128
ADS 33 (1), with an exception if the loss is due to a mistake of navigation that is not
caused wilfully or by gross negligence.
129
DC § 67 second paragraph, FHC section 42.2 and NMIP § 3–33.
130
ITCH clause 6.2 and IHC clause 2.2 last sentence, concerning accidents in the loading,
discharging or shifting of fuel or cargo, bursting of boilers, breakage of shafts and latent defects,
the negligence of the master, crew or pilots, the negligence of repairers and barratry, cf. also
Wilhelmsen & Bull (2007), op. cit., p. 188.
312 trine-lise wilhelmsen

conditions.131 More important, however, was the Secretariat’s strong criticism of

the formal structuring and drafting of such conditions, which was particularly
directed towards the insurance conditions used in the British market. The
Norwegian conditions, in contrast, were highlighted as worthy of emulation in
an international context. The report formed the basis for the work of a separate
Group of Experts, which over subsequent years produced draft texts for model
clauses in hull and cargo insurance. The clauses were adopted in 1985 by the
Trade and Development Board, and finally published by UNCTAD in 1989
(TD/B/C.4/ISL/50/Rev.1).132 The model clauses basically deal with questions
on scope of cover under standard marine policies, and do not address questions
with a bearing on substantive law. On several points, the clauses provide for
alternative solutions. As far as the author is aware, neither the model clauses
themselves nor insurance conditions based on them are used anywhere in the
world. In this respect, the UNCTAD initiative was a failure.
During the 1990s, the UK MIA was criticised by several countries which
had started an evaluation of their own national insurance regulation.133 As a
result, the CMI took the initiative in 1998 to launch a new attempt to estab-
lish international principles for marine insurance. At a Marine Insurance
Symposium in Oslo in June 1998, the decision was taken to move forward by
means of undertaking a comparative study of international marine insurance
with the purpose of establishing model clauses. The purpose was to harmonise
areas where a measure of uniformity would better serve the marine insurance
industry.134 An underlying assumption was that areas of difference where
differences provided sound reasons for competitive edge and where seeking uni-
formity would be undesirable should not be harmonised.135 Since 1999, an
International Working Group has been working on a comparative analysis
covering several topics which have been discussed at several international con-
ferences. These comparative analyses have also been published in the form of
several articles.136 A synopsis of several issues was presented at a conference in
Singapore in 2000. Here it was decided that the work should proceed.

131
The Report from the UNCTAD Secretariat in 1975 voiced criticism on some of the mate-
rial solutions found in leading international insurance conditions, see Legal and Documentary
Aspects of the Marine Insurance Contract (TD/B/C.4/ISL/27). Cf. Bull, Opening. Aim of the
Symposium. The Norwegian Marine Insurance Plan 1996. Experiences from UNCTAD con-
cerning harmonisation of Marine Iinsurance, in: MarIus no. 242, pp. 1 et seq.
132
UNCTAD Report 1989 TD/B/C.4/ISL/50/Rev.1
133
Inter alia, Australia, New Zealand and South Africa, which all use the UK MIA, cf.
Wilhelmsen 2001 pp. 53–57, and the US.
134
Hare, The CMI review of marine insurance. Report to the 38th Conference of the CMI
Vancouver, 2004, CMI Yearbook 2004, (Hare 2004) p. 250.
135
Ibid., p. 250.
136
Cf. supra, note 2.
 marine insurance regimes and their impact 313

However, so far no model clauses have been proposed. At a conference in

Vancouver in 2004 the analyses were summarised into 11 issues by the South
African maritime law professor John Hare.137 These guidelines concern: good
faith, disclosure, alteration of risk and essential terms:
1. Marine insurance contracts are contracts of good faith. Good faith requires
each party to conduct itself with the other party in relation to all material
aspects of their insurance contract according to objective norms recognized
by the society in which they are being judged.
2. Acting in good faith requires each party before and at all times during the
contract and in the submission of claims, to be honest in relation to all mate-
rial matters, to disclose all – and not misrepresent any – material facts; and to
disclose any material alteration of the risk during the currency of the policy.
3. Certain terms may be stated by the parties in the contract as requiring strict
compliance; the contract may stipulate that in the absence of strict compli-
ance by either party, the other party shall have the right to cancel the contract
(or even that the contract shall terminate automatically), regardless of whether
non-compliance caused the loss. Such should be the case in relation to safety
at sea, classification, ownership, management and ISM Code compliance.
The description “warranty” should not be used, and the English law warranty
and its effects in law should be abolished.
4. Materiality in relation to an absence of good faith, a failure to disclose, a
misrepresentation or a breach of a contractual term (not requiring strict com-
pliance) is assessed according to a two-tier test of whether a reasonable insurer
and a reasonable assured, both operating within the norms of the society and
the context of the transaction in which such materiality is being adjudged,
would consider the conduct to have affected the acceptance of the risk, the
assessment of the premium and or the evaluation of claims by the insurer, and
or the acceptance of cover by the insured.
5. Materiality requires a causative link between the breach and the loss or the
claim.
6. Any material absence of good faith or material breach of the obligation to
disclose or not to misrepresent or any material breach of an essential Marine
Insurance term going to the root of the contract, gives the aggrieved party the
right to treat the contract as at an end, effective from the date of the breach,
with the right to claim damages. Material breach of a non-essential term not
relating to good faith, disclosure or misrepresentation and not contractually
stipulated as requiring strict compliance, suspends cover until the breach is
remedied.
7. A non-material absence of good faith or breach of the obligation to disclose
or not to misrepresent not founding a right to cancel the contract of insur-
ance may nevertheless give rise to a claim for damages.
The guidelines are first and foremost addressed to marine insurance markets
using Anglo-American insurance conditions. In the Scandinavian marine

137
Hare (2004), op. cit., pp. 248 et seq.
314 trine-lise wilhelmsen

insurance market, the issues addressed in the guidelines have already been
resolved through detailed regulation in the standard clauses.138 Further, the list
is more of a “personal wishlist” from Professor Hare than an actual set of
guidelines, as it was not prepared by the working group.139 Since the Vancouver
Conference, however, little progress has been made. The guidelines have been
characterised as a “discussion document” and activity has taken place only on
a national basis.140 Marine insurance is not a topic listed on the programme
for the CMI Conference in Athens 2008.
The situation today is that the harmonisation process has come to a standstill.
Thus, each country, Norway included, is using its own separate national clauses.
The international initiative did, however, result in the introduction of the
International Hull Clauses 2002 in the English market in order to resolve some
of the common law issues which had been the subject of criticism. This initiative
was further developed with the introduction of the 2003 version.141 However,
sources in the English insurance market indicate that the International Hull
Clauses are little used, and that the market participants prefer the ITCH 1983.
Apparently, 75 % of the market is insured on the latter clauses.142
The conclusion of this work so far seems to be that the market participants
believe that competition is facilitated by national regulation.

VII. Summary and Conclusions

1. The National Picture

Section 4 showed that in several countries there are no mandatory rules apply-
ing to marine insurance, but there may be some general mandatory contrac-
tual principles. This is true in the case of Norway, Sweden, Finland and
Germany. In the other countries there is some mandatory regulation, but the
extent of this varies. In general, rules concerning the duty of disclosure or the
duty of good faith are often mandatory. Mandatory regulation seems to be
most extensive in Denmark, while the extent of mandatory regulation in the
UK MIA is unclear.
As a starting point, mandatory rules discourage economic efficiency and
perfect competition. As several countries manage without mandatory protection

138
Hare (2004), op. cit., pp. 257–258.
139
Hare, Report of the CMI Standing Committee, CMI Yearbook 2005/2006 (Hare
2005/2006) p. 389.
140
Ibid., p. 389, where the national developments in Australia, France, Germany, South
Africa, US and UK are described.
141
Ibid., p. 391.
142
Wilhelmsen & Bull, Handbook in Hull Insurance, pp. 36–37. These clauses were amended
in 1995, but the 1995 version seems to be in little use.
 marine insurance regimes and their impact 315

in marine insurance, it may be argued that preventing such freedom of choice

is unnecessary.
The presentation has also demonstrated that contractual freedom in
marine insurance is not generally used by insurance companies in order to
establish their own separate contracts. The tendency is rather for each coun-
try to operate with a set of standard clauses, or – if no such clauses exist – to
use the English ITCH. If these standard clauses are agreed, they should not
be problematic in relation to the EU competition rules. On the other hand,
where the clauses are not agreed with organisations representing the assureds,
it may be questioned whether this practice is permitted in relation to the
group exemptions provided for according to Commission Regulation (EEC)
no. 3932/92 or whether it is contrary to Article 81 of the EU Treaty. It may
also be argued that national standard clauses create monopoly and are con-
trary to freedom of choice and perfect competition. This problem is countered
by the use of agreed documents where the assureds through the participation
in the construction of the contract have influenced the content.
The use of standard clauses may be explained by the fact that the insurance
product is so complex legally, and the contractual regulation so extensive, that
the time and resources required to develop individual contracts would far
exceed the benefits of this approach. If so, high transaction costs may be coun-
tered by the use of standard clauses, which will also ensure the provision of
better information about the product and make it easier to compare prices
offered by different companies. Seen from this perspective, the use of standard
contracts does not discourage economic efficiency.
In terms of economic efficiency, however, agreed standard clauses are pref-
erable to non-agreed standard clauses because the reduction of transaction
costs and the risk for asymmetric information is combined with freedom of
choice on the part of the assureds. An argument to support this is statistics
demonstrating that the insurers within the CEFOR group in the Nordic
countries do not earn a lot of money. The hull net loss ratio (relationship
between premium and losses) was at a very low peak in 1992–1995 (between
47 and 54 %) was gradually increased to 1999 (134 %), then gradually
reduced to 98 % in 2003. From 2003 to 2007 the hull net loss ratio has varied
between 98 % and 110 %.143

2. The International Picture: Free Movement of Insurance Services

In relation to the EU goal of free movement of insurance services, it may be
argued that different mandatory rules in different countries may distort

143
2007 CEFOR Statistics – Part 3, jfr. http://www.cefor.no/statistics/statistics.htm.
316 trine-lise wilhelmsen

competition in favour of countries with less strict regimes.144 This result

may be prevented by the right in marine insurance to choose another coun-
try’s legislation as background law. It is, however, questionable how realistic
this approach will be. The mandatory regulation in the Danish ICAs is
included in the standard contracts used in Denmark, implying that the
application of a foreign background regime will not make any difference in
practice. In addition, the Danish regulation is very similar to the type of
regulation found in the Norwegian, Swedish and Finnish standard contrac-
tual conditions. A more valid argument in favour of mandatory rules not
distorting competition is, however, that the level of protection provided is
fairly similar and that the variations do not seem to reflect variations in the
mandatory regimes.
A major obstacle to the free movement of services, on the other hand, seems
to be the complexity of the legislative and private regulation of insurance
contracts. This chapter has demonstrated that marine insurance legislation is
extremely complicated and regulation of marine insurance will often consist
of several layers of legislation, i.e., a general act combined with an insurance
act, as well as private codification in the form of a Plan or Convention which
is not always directly included in the conditions. Even though the issues are
the same, the structure of the regulation, the approach chosen and the detail
of the regulation vary. In some systems, a combination of national background
legislation and the use of ITCH clauses may also cause problems when inter-
preting and analysing the extent of coverage.
These differences seem to emphasise that in marine insurance, contrary to,
for instance, sale of goods or transport services, competition takes place through
the insurance conditions themselves, i.e., the conditions themselves are the
commodity.145 It may therefore take a lot of time and effort to obtain full
information about the insurance product, which in turn will result in high
transaction costs. It may be argued that the transaction costs in such cases will
easily exceed the benefits gained from full information. This implies that effect-
ing insurance on the conditions applicable in another country may easily result
in lack of full information on the part of the buyer, causing a situation of
asymmetric information. From this perspective, competition may be facilitated
by harmonisation.146 On the other hand, experience from the work carried
out under the auspices of the CMI does not seem to support this conclusion.

144
Cf. for instance Council Directive 93/13/EEC on unfair terms in consumer contracts,
preamble, Bull, Forsikringsrett, Draft 2008, chapter 3.6.
145
Honka, Harmonization of hull insurance contracts in light of seaworthiness and safety
regulation, in; MarIus no. 242, pp. 165 et seq.
146
Wilhelmsen (1998), op. cit., p. 57.
 PROTECTION & INDEMNITY CLUBS AND COMPETITION

Dimitrios Christodoulou*

I. The Protection and Indemnity Insurance System

1. Protection and Indemnity (P&I) Clubs
2. The International Group of P&I Clubs
3. The International Group Pooling (IGP) Agreement
4. The International Group (IG) Agreement
II. The International Group of P&I Clubs and Competition Law
1. Examination of the Application of EU Competition Law to the P&I Insurance
System
2. The 1999 Commission Decision on the Conformity of the P&I Insurance
System: the Issues Raised and the Reasoning of the Commission
A. The Commission’s Decision Regarding the IGP Agreement
i) Provisions Regarding the Approval of Rules, Reinsurance Arrangements
and Accounting Practices
ii) Provisions Regarding the Collective Purchase of Reinsurance
iii) Provisions Regarding the Minimum Common Level of Cover
B. The Commission’s Decision Regarding the IG Agreement
i) Provisions Regarding the Quotation Procedure and its Sanctioning
ii) Rules on Minimum Cost for Tankers
iii) Release Calls
C. The Commission’s Decision on the Issue of the Abuse of Dominant Position
III. The Position Post-2009: The Issue of the Validity of the IGP Agreement and the
IG Agreement
1. The Legal Framework
2. The IGP Agreement and the IG Agreement Remaining in Force as a Necessary
Condition for the Provision of Insurance Cover in the Relevant Market
IV. Concluding Remarks

I. The Protection and Indemnity Insurance System

1. Protection and Indemnity (P&I) Clubs

Protection and Indemnity (P&I) insurance is designed to provide comprehen-
sive cover of contractual and third party liabilities incidental to the ownership
and operation of ships.1

* Lecturer in Commercial Law, Faculty of Law, University of Athens. Attorney at Law,

Ph.D., LL.M., LL.M.
1
See Coghlin, T., Protection & Indemnity Clubs [1984] LMCLQ 403.
318 dimitrios christodoulou

P&I insurance is traditionally provided by associations of shipowners,

ship-operators and charterers called Protection and Indemnity Clubs (P&I
Clubs).2 P&I Clubs are mutual non-profit-making entities, insuring their
members. P&I Club members do not pay premiums, but contributions which
are called “calls”. The English 1906 Marine Insurance Act3 provides in s 85(2)
that “the provisions of the Act relating to premium do not apply to mutual
insurance, but a guarantee, or such other arrangement as may be agreed upon,
may be substituted for the premium”.
While premiums paid to a profit-making insurer are known beforehand
because they are assessed and fixed in advance, and there is no obligation on
the part of the insured to pay any additional premium for the coverage of the
risk, P&I club members will pay advance calls, i.e. the usual members’ contri-
butions, which are assessed and calculated on the basis of the anticipated ordi-
nary losses,4 but may subsequently be required to supplement their payment
by calls for further contributions. The latter are called supplementary calls and
are required in order to cover losses which run in excess of ordinary losses, that
is of losses which are anticipated on the basis of statistical data regarding their
occurrence and size.5 Thus, while commercial insurers bear the risk of eco-
nomic loss, such risk lies with the individual club members who may be called
to pay supplementary contributions.
Supplementary calls may be unlimited. The solvent club members are under
the obligation to cover excess losses when they occur.6 It has been argued that
a P&I Club is solvent as long as it has solvent members, and thus that a P&I
Club cannot go bankrupt.7 However, it would be more accurate to suggest
that mutuality and the ability of a P&I Club to turn for supplementary

2
See generally, Hazelwood, S., P&I Clubs Law and Practice, 3d ed., LLP 2000, 1st chapter.
Also see Tilley, M., The Origin and Development of the Mutual Shipowners’ Protection &
Indemnity Associations [1986] 17 JMLC 261. An in-depth analysis of the history and the
modern structure and operation of P&I Clubs is well beyond the scope of the present
contribution.
3
6 Edw 7 c 41.
4
See Merkin, R., Colinvaux’s Law of Insurance, 8th ed., London 2006, p. 466.
5
Merkin, R., op. cit., p. 285.
6
This is expressly stated in the preamble to the International Group Agreement n. 2 “Since
in a mutual non-profit making insurance association any under-contribution by one insured must be
made good by over-contribution by the other insured…”. For the position of the P&I Clubs as
creditors of a bankrupt member see Kimbal, J.D., P&I Clubs and Maritime Bankruptcies, in
Piraeus Bar Association, The Protection of Maritime Creditors, 1st International Conference of
Maritime Law, Piraeus 28–30 May 1992, p. 253.
7
See Levy, H., Reinsurance and the Ability to Absorb Large Claims, in Swedish Maritime
Law Association, P&I Insurance–The Seventh Axel Axson Johnson Colloquium on Maritime
Law, May 27–28, 1993, 171, at p. 173.
 protection & indemnity clubs and competition 319

contributions to its members make it difficult for it to go bankrupt.8 They do

not, however, make it impossible. Indeed, the case of the Oceans Club proves
that a P&I Club can go bankrupt.9
It is said that a P&I member is both an insured and an insurer.10 That was
true of the members of the old unincorporated clubs where the liability of
each member was individual for his own proportion only.11 Modern P&I
Clubs, however, are generally incorporated and their members contract with
the corporation rather than with the other members.12 Therefore, it would not
be accurate from a contractual point of view to suggest that the members of a
club continue to have the dual capacity of the insured and the insurer, since it
is now the corporate body of the club which is considered to be the insurer
while the individual member is considered to be only the insured.13 Thus, the
individual member of the P&I Club is entitled not to contributions from
other members of the Club towards his loss, but only to an indemnity from
the Club itself.14 Hence, members do not enforce rights against other mem-
bers but against the body corporate of the Club.15

8
See Pfennigstorf, W., Public Law of Insurance, in Ziegel J. (chief ed.), International
Encyclopaedia of Comparative Law, J.C.B. Mohr (Paul Siebeck) and Martinus Nijhoff
Publishers 1996, Vol. IX Commercial Transactions and Institutions, Ch. 7, p. 92.
9
The reason for the bankruptcy of the Oceanus Club was that there was a limitation of the
supplementary calls which the members were obliged to pay and all members of the Oceanus
Club had contracted on a fixed-term basis. That was combined with a reinsurance agreement
for the coverage of all standing obligations. When the reinsurance agreement collapsed the
Club went bankrupt, see Tilley, M., The Protection and Indemnity Clubs and Bankruptcy
[1986] 17 JMLC 531. On the methods and possibility of P&I Club bankruptcy see Murray,
I., The Protection and Indemnity Clubs and Bankruptcy: An English Perspective [1985] 59
Tul.L.Rev. 1445.
10
See The Lion Marine Insurance Association Limited v Tucker [1883] 12 QB 176, at pp. 187,
188, per Brett M.R.; also, The Standard Steamship Owners Protection and Indemnity Association
(Bermude) Ltd. v Gann and Another [1992] 2 Lloyd’s Rep. 528, at p. 533, per Hirst J.; see gener-
ally Hill, Robertson and Hazelwood, Introduction to P&I, 2d ed., London, LLP 1996, p. 11.
11
See Reynardson, B., The History and Development of P&I Insurance: The British Scene
[1969] 43 Tul.L.Rev. 457. s 85(1) of the 1906 Marine Insurance Act seems to reflect the older
organizational form of P&I insurance.
12
See generally, Hazelwood, S., op. cit. Also, Farantouris, N., Institutions of Marine Insurance:
the Case of P&I Clubs, in Aegean University, Shipping and Marine Insurance, Athens 2007, 11
at p. 23 (in Greek).
13
Murray, I., The Protection and Indemnity Clubs and Bankruptcy, op. cit., at p. 1447; see
also Mance, Insolvency at Sea [1995] LMCLQ 34, at p. 45.
14
See Tilley, M., Protection and Indemnity Club Rules and Direct Action by Third Parties
[1986] 17 JMLC 427, at p. 434. For a general analysis of mutual insurance from an organiza-
tional point of view see Hansmann, H., The Ownership of Enterprise, Belknap Press, London
1996, especially ch. 4.
15
Mustill, M. & Gilman, J. (eds.), Arnould’ s Law of Marine Insurance and Average, 16th
ed., London 1981, Vol. I, para. 130 et seq.
320 dimitrios christodoulou

Nevertheless, addressing the issue of excess losses through supplementary

calls creates financial uncertainty to club members because they are not in a
position to know in advance the cost of their participation in a P&I Club, i.e.
the cost of their insurance coverage.

2. The International Group of P&I Clubs

The method which the London insurance market invented at the end of the
19th century in order to deal with the issue of excess losses was the creation of
a group of P&I Clubs which would reinsure losses above a certain limit. That
was called “excess loss reinsurance”. Under that arrangement, every P&I Club
which was a member of the group would be liable to cover the insured loss
from its own resources up to a certain limit. If the insured loss exceeded that
limit then the group would step in and cover the excess loss up to a certain,
previously agreed upon, limit. This first group of P&I Clubs was founded in
London in 1899 by English clubs and was called “the London Group”.16
In the modern era, the London Group has become not simply interna-
tional, but truly global. Non-English P&I Clubs have joined the group which
is now called “the International Group of P&I Clubs”.17 P&I Clubs which are
members of the International Group provide insurance coverage to shipown-
ers and ship operators whose business establishment is found throughout the
world, including many European states which are members of the EU. It is
estimated that approximately 89% of world tonnage and 100% of European
tonnage is covered by P&I Clubs which are members of the International
Group.18 Thus, the International Group has indeed a global reach. The insur-
ance cover provided by its members is truly global. P&I insurance coverage for
the remaining world tonnage is provided by smaller P&I Clubs, non-members
of the International Group or, at a smaller scale, by commercial insurers.

16
The P&I Clubs which formed the London Group in 1899 were the UK Club, the
Britannia, the Standard Club, the London Club, the Newcastle Club and the Sunderland.
17
Currently, the following Clubs are members of the International Group: American
Steamship Owners Mutual Protection and Indemnity Association, Inc., Assuranceforeningen
Gard, Assuranceforeningen Skuld, The Britannia Steam Ship Insurance Association Limited,
The Japan Ship Owners’ Mutual Protection & Indemnity Association, The London Steam-
Ship Owners’ Mutual Insurance Association Limited, The North of England Protecting &
Indemnity Association Limited, The Shipowners’ Mutual Protection & Indemnity Association
(Luxembourg), The Standard Steamship Owners’ Protection & Indemnity Association
(Bermuda) Limited, The Steamship Mutual Underwriting Association (Bermuda) Limited, The
Swedish Club, United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited,
and The West of England Ship Owners Mutual Insurance Association (Luxembourg).
18
Commission Decision of 12 April 1999 relating to a proceeding pursuant to Articles 85
and 86 of the EC Treaty and Articles 53 and 54 of the EEA Agreement (Cases No IV/D-
1/30.373 - P & I Clubs, IGA and No IV/D-1/37.143 - P & I Clubs, Pooling Agreement), OJ
L125/12, (hereinafter the “Decision”), paras. 9–10.
 protection & indemnity clubs and competition 321

The International Group functions through a constitution. It is the indus-

try’s representative at non-governmental organizations, before governmental
organizations such as the IMO, the UNCITRAL and the OECD, as well as
national governments and the EU. The International Group is the forum
where its members share information, develop common policy and promote
shipowners’ interests in relation to liability and insurance issues.
The most important function of the International Group is the co-ordination
of reinsurance among its members. Such coordination is pursued through two
agreements which have been signed between the members under the auspices of
the International Group. Those are the International Group Pooling Agreement
(IGP Agreement) and the International Group Agreement (IG Agreement).

3. The International Group Pooling (IGP) Agreement

The IGP Agreement is a pooling of claims agreement, which effectively regu-
lates reinsurance among the P&I Clubs members of the International Group.
The last version19 of the IGP Agreement provides for the following:
The first 7 million US dollars of an insured loss is borne by the P&I Club
whose member has incurred the liability.20 This is known as the retention of
the P&I Club.21 The IGP Agreement specifically states that a claim is eligible
for pooling only if the relevant P&I Club has, itself, paid the retention in
respect of that claim.22 Most of the claims faced by P&I Clubs fall into that
category of coverage. Thus, during the period 1985–1995, 99% of the claims
representing 82% of the total value of claims fell into that category.23
The excess of any insured loss over 7 million US dollars is reinsured in four
levels:
1. Insured loss up to the amount of 30 million US dollars is mutually covered
by the members of the International Group according to three factors,
namely each member Club’s claims, insured tonnage and calls, both
advance and supplementary.
2. Insured loss of between 30 and 50 million US dollars is reinsured by the
Hydra Insurance Co. Ltd. based in Bermuda. Hydra is a captive insurer
which was specifically founded to serve the needs of the members of the
International Group.24

19
That is the 2007 version.
20
IGP Agreement Cl. 6 and Appendix VI Cl. 2.
21
See generally, Athanassiou, L., The Debate on the Limitation of Liability for Maritime
Claims, Ant. N. Sakkoulas Publishers, Athens 2005, pp. 126–127 (in Greek).
22
IGP Agreement Cl. 3.1(f ).
23
Decision, para. 16.
24
See IGP Agreement Cl. 12.1(a).
322 dimitrios christodoulou

3. Insured loss in excess of 50 million US dollars and up to 2.05 billion US

dollars is covered by the Group General Excess Loss Reinsurance Contract,
which the members of the International Group collectively agree and
purchase from profit-making (commercial) insurers. Coverage for oil
pollution risks extends only up to 1 billion US dollars. The premium
paid on the Group General Excess Loss Reinsurance Contract is appor-
tioned among all the participants according to the tonnage which is
covered by each of them. However, the payable amount per ton is calcu-
lated on the basis of the type of the vessel. Vessels the operation of which
has been the cause of insured losses in the past are burdened with larger
contributions. According to the International Group, the Group General
Excess Loss Reinsurance Contract is today the largest contract of marine
insurance.
4. Insured loss in excess of 2.05 billion and up to 3.05 billion US dollars is
mutually covered among the members to the IGP Agreement.25 This is the
so-called overspill liability.
If an overspill liability claim arises, each Member will have to contribute up to
2.5 % of the maximum liability which it would have to face according to
Article 6(1)(b) of the International Convention on Limitation of Liability for
Maritime Claims of 1976.26
P&I Clubs are not liable to contribute to the covering of the overspill liabil-
ity to the extent that they can prove that they are unable to collect an amount
equal to that part of their contribution which they had intended to pay out of
the levy of overspill calls on their members, because any overspill calls so lev-
ied are not economically recoverable.27
Any dispute among the P&I Clubs as to amounts which are to be deemed
not economically recoverable is referred to a panel of experts.28

25
Before 20 February 1998, this figure was set at around €16.5 billion (USD 18 billion)
(20 % of the maximum liability according to the International Convention on Limitation of
Liability for Maritime Claims of 1976). In the Statement of Objections the Commission con-
sidered that this high minimum level of cover was contrary to Article 85 because it impeded
clubs from competing by offering levels of cover lower than around €16.5 billion (USD 18
billion), for which substantial demand existed. It also considered this agreement on a high com-
mon level of cover as an abuse pursuant to Article 86 of the collective dominant position held
by the P&I Clubs, consisting in limiting the range of insurance cover available in the market to
the prejudice of consumers. In reaction to the Statement of Objections, the International
Group Clubs agreed to lower the minimum common level of cover from around €16.5 billion
(USD 18 billion) to €3.9 billion (USD 4.25 billion). That was the amount the Commission
took into account in issuing the Decision, see Decision, paras. 21 and 22.
26
IGP Agreement Cl. 14.2(a).
27
IGP Agreement Cl. 14.3(b). On the history of this clause see Coghlin, T., The P&I Clubs
Exposure to Catastrophe Calls and Claims [1996] IJOSL 131, at p. 141.
28
IGP Agreement Cl. 15.
 protection & indemnity clubs and competition 323

4. The International Group (IG) Agreement

As stipulated in the IG Agreement’s preamble, the parties to the IG Agreement
are also parties to the IGP Agreement for the purpose of dividing and sharing
among them certain layers of liabilities arising out of the risks which they
insure.29 The IG Agreement is intended to play the supplementary role of
facilitating the functioning of the IGP Agreement.
The effective function of the IGP Agreement, however, depends upon the
maintenance of goodwill between the P&I Clubs which are members of it.30
The preamble states that the equitable relationship between members within
an association as well as the goodwill between associations would be jeopard-
ized unless a measure of restraint were in place with regard to the attraction of
new members by the offer of reduced premiums.31 The IG Agreement sets
procedures for the avoidance of a price war among the members of the
International Group.32

II. The International Group of P&I Clubs and Competition Law

1. Examination of the Application of EU Competition Law to the P&I

Insurance System
The term undertaking is undefined in Art. 81(1) of the EC Treaty.33 It is a term
which is broadly construed and extends to any entity engaged in an economic
activity regardless of its legal status or the way it is financed.34 Even associa-
tions of persons which do not have legal personality under the law of the
Member State where they operate are considered as undertakings,35 as long as
they are economically active. The pursuit of profit is not a necessary element
of the concept of undertaking. In Van Landewyck v Commission, ECJ held
that FEDETAB, an association which represented the majority of cigarette
manufacturers in Belgium and Luxembourg, was an undertaking subject to
the competition rules, notwithstanding the fact that its role was that of the

29
IG Agreement preamble (6).
30
IG Agreement preamble (8).
31
IG Agreement preamble (9).
32
See IG Agreement Cls. 2–4 and 9.
33
Weatherhill, S. & Beamont, P., EU Law, 3d ed., London 1999, p. 805 et seq.
34
Case C-41/90 Hofner & Elser v Macrotron [1991] ECR I-1979, para. 21. See Roth, P.-Rose,
V., (eds.) Bellamy & Child, European Community Law of Competition, 6th ed. Oxford,
Oxford University Press, 2008, p. 92 et seq. (hereinafter cited as Bellamy & Child ). See also
Hellenic Competition Authority Decision 9/1981, reported in Koutsoukis D. & Tzouganatos
D., The Application of Law 703/1977, A 1979–1986, Athens 1987, p. 30 (in Greek).
35
See Dansk Rorindustri v Commission [2005] ECR I-5425 para. 113. See Kotsiris L.,
Competition Law, 3d ed., Athens 2000, p. 411 (in Greek).
324 dimitrios christodoulou

representative and that it did not pursue profit.36 Generally, an activity

consisting in offering goods and services on a given market is held to be an
economic activity.37
P&I Clubs are non-profit-making entities which are actively engaged in
economic activities, since they actively pursue the insurance coverage of their
members not only through the latter’s contributions but also through reserves
which they accumulate.38 Therefore, P&I Clubs are considered as undertak-
ings and the EC competition rules apply to them.
It is because P&I Clubs were considered as undertakings under the EC
Treaty that the European Commission took an interest in the dealings of the
International Group of P&I Clubs, and especially in the IGP Agreement and
the IG Agreement.
Since the beginning of the 1980s the Commission has had the opportunity
to review both the IGP and the IG Agreements from the point of view of their
compliance with EU competition rules.
a. On 16th December 1985, the Commission granted a ten-year exemption
from Art. 85(1) of the Treaty for the application of the IG Agreement.39

36
Cases 209–215, 218/78 [1980] ECR 3125 para. 88.
37
Case C-35/96 Commission v Italy [1998] I-3851 para. 36.
38
From a financial point of view, major mutual insurers are treated similarly to profit-mak-
ing insurers. See for example the Greek Legislative Decree 400/70 Arts. 35 and 17b. See
Pfennigstorf, W., Public Law of Insurance, op. cit., p. 92; also see Rokas, I., Private Insurance-The
Greek Law Relating to Insurance Contracts and Insurance Enterprises, 11th ed., Athens-
Komotini 2006, p. 755 et seq. On the issue of accumulation of reserves by P&I Clubs see
Murray, I., The Protection and Indemnity Clubs and Bankruptcy, op. cit., at p. 1464. See also
Tilley, M., The Protection and Indemnity Clubs and Bankruptcy, op. cit., at p. 532, where the
author suggests that the building up of contingency funds which can be drawn upon in years
when claims are heavy, the aim being to limit fluctuation in supplementary calls, may help the
P&I club members to stabilize their insurance costs but it is a practice which steps away from
the provision of insurance on a purely mutual basis.
39
Commission Decision of 16 December 1985 relating to a proceeding pursuant to Article
85 of the EEC Treaty (IV/30.373-P&I Clubs) OJ L376/2. On 18 June 1981, 17 P&I Clubs
notified to the Commission, in accordance with Article 4 of Regulation No. 17, the text of an
agreement which they intended to put into effect, with a view to obtaining negative clearance
or alternatively an exemption under Article 85(3) of the Treaty. The IG Agreement came into
force on 8 December 1981. After a preliminary examination, the Commission considered that
the agreement contained a number of clauses which could not be exempted under Article 85(3).
On 18 February 1983 it therefore opened proceedings and on 24 February 1983 sent the appli-
cants a statement of objections prior to a decision under Article 15(6) of Regulation No. 17.
Following discussions with the Commission, the clubs submitted on 1 November 1983 a mem-
orandum setting out a number of proposals for amendment of the IG Agreement. The clubs
asked whether the Commission would be prepared to issue an Article 19(3) notice in respect of
the IG Agreement if it was amended in accordance with the proposals set out in the memoran-
dum. On 1 December 1983, the Union of Greek Shipowners and the Greek Shipping
Cooperation Committee, whose members are members of the P&I Clubs, lodged a formal
complaint pursuant to Article 3 of Regulation No. 17 in relation to: (i) an agreement in
 protection & indemnity clubs and competition 325

Upon its expiry in February 1995, the International Group asked for a
renewal of the exemption.40 On 12 April 1999, the Commission held that
the IGP Agreement was not in violation of the EC competition rules.41
b. As far as the IG Agreement was concerned the Commission held that
it violated the EC competition rules in two cases. Those were, namely, the
IG Agreement provisions concerning (a) the quotation procedures, and
(b) the minimum costs for tankers, in so far as they applied to the retention
costs. In those two cases the Commission granted an exemption
pursuant Article 81(3) of the Treaty. The exemption expires on 20 February
2009.42
c. The issue of compliance of the two agreements with EU Competition Law
was, thus, settled.

2. The 1999 Commission Decision on the Conformity of the P&I Insurance

System: the Issues Raised and the Reasoning of the Commission
Let us consider more closely the issues raised at the review and the relevant
reasoning of the European Commission in its dealing with them:

similar terms to the IG Agreement which was operated by the P&I Clubs prior to the adoption
of the IGA; (ii) the IG Agreement as notified and as adopted; (iii) the IG Agreement as then
proposed to be modified. On 12 July 1984 the Commission sent to the P&I Clubs a statement
of objections in which it stated that having examined the information available, it considered
that there were grounds for finding that certain clauses of the IG Agreement infringed the
provisions of Article 85(1) and did not satisfy the conditions for exemption contained in Article
85(3). On 27 July 1984 the P&I Clubs notified the text of a modified IG Agreement (IG
Agreement 1984) for which they requested negative clearance or alternatively an exemption
under Article 85(3) of the Treaty. That text came into force on 31 July 1984. On 2 August 1984
the Commission informed the clubs that, in the absence of an agreement on all the issues in the
Statement of Objections which would enable the Commission to grant an exemption, the
proceedings under Article 85(1) had to be continued. On 27 September 1984 the clubs
informed the Commission that, without prejudice to their position in the existing proceedings
and in an attempt to settle the procedures under Article 85(3), they were prepared to modify
the IG Agreement as notified in 1984. The Commission granted to it a formal exemption for
10 years, see Commission Decision of 16 December 1985 relating to a proceeding pursuant to
Article 85 of the EEC Treaty (IV/30.373-P&I Clubs) OJ L376/2, paras. 1–10. This expired in
February 1995.
40
In June 1997 the Commission addressed a Statement of Objections to the International
Group, considering that both the IGP Agreement and the IG Agreement were in breach of the
competition rules of the EC Treaty. This Statement of Objections had been preceded by a com-
plaint against the International Pooling Agreement submitted by the Greek Shipping
Cooperation Committee. After the adoption of the Statement of Objections, the International
Group decided to amend its arrangements in order to comply with EC and EEA competition
rules. It notified an amended version of the IGP Agreement in July 1998 and of the IG
Agreement in October 1998, Decision, paras. 46 et seq.
41
Decision, paras. 65–67.
42
Decision, Art. 3.
326 dimitrios christodoulou

A. The Commission’s Decision Regarding the IGP Agreement

After reviewing the provisions of the IGP Agreement, the Commission identi-
fied three cases where issues of restriction on free competition could be raised.
Those were the provisions regarding (a) the approval of rules, reinsurance
arrangements and accounting practices, (b) the collective purchase of reinsur-
ance and (c) the minimum common level of cover.
Before dealing with the above issues, the Commission considered the con-
ditions existing then in the insurance market. It came to the conclusion that
insurance coverage to the extent and at the cost offered through the IGP
Agreement was possible only through an insurer or a group of insurers hold-
ing a share of the insurance market larger than 50%.43 Each of the P&I Club
members of the International Group would be unable to offer on its own the
insurance coverage at the extent to which they could through the IGP
Agreement. In other words, the Commission came to the conclusion that
the IGP Agreement was the only alternative for the provision of insurance
coverage.
Based on such conclusion, the Commission turned to the examination of
the three issues above.
i) Provisions Regarding the Approval of Rules, Reinsurance Arrangements and
Accounting Practices
According to the IGP Agreement the rules, the reinsurance arrangements and
the accounting practices of each P&I Club which is party to the Agreement
are subject to approval by all the other club members of the International
Group.44 To that end, each club must provide each of the other clubs and the
Secretary of the International Group with a copy of its rules as well as details
of its accounting practices and its accounts by the 31st October of each year.
If an objection is made and not answered to the reasonable satisfaction of any
of the clubs, a decision may be taken requiring a majority of three quarters of
the clubs to withhold in whole or in part for the next policy year the benefits
of the Agreement from that club which has failed to satisfy the other clubs.45
The Commission held that, since no member could be forced to contribute
to the provision of insurance cover under policy conditions it had not agreed,
the IGP Agreement could function properly only if all members agreed on the
conditions that each of them included in its policies.46

43
Decision, paras. 72–74.
44
IGP Agreement Cl. 16.1.
45
IGP Agreement Cl. 16.1 (d).
46
Decision, para. 81.
 protection & indemnity clubs and competition 327

ii) Provisions Regarding the Collective Purchase of Reinsurance

As stated above, insured loss in excess of 50 million US dollars and up to 2.05
billion US dollars is reinsured through the Group General Excess Loss
Reinsurance Contract, which the members of the International Group have
signed with commercial insurers. This is an agreement for the collective pur-
chasing of reinsurance.
In the past, it has been held that common purchase of supplies could be
considered contrary to Art. 81(1) of the Treaty.47 In this case, however, the
Commission held that such collective purchase of reinsurance did not fall
under the prohibition of Art. 81(1) of the Treaty since it was proven that,
without it, most of the P&I Clubs would not have been able to obtain
reinsurance up to the level then obtained.48
iii) Provisions Regarding the Minimum Common Level of Cover
The Commission held that without a minimum common level of cover, which
currently is 3.05 billion US dollars, the IGP Agreement could not function
properly. The reason was that no member would be willing to share claims
brought to the pool by other clubs of a higher amount than those it could
itself bring to the pool. In an agreement such as the IGP Agreement between
mutual associations, which do not charge premiums but only call in contribu-
tions, there was no workable method available to force the members which
would bring larger claims to compensate the others.49
According to the Commission, the P&I Clubs had agreed to offer only a
minimum level of cover through the IGP Agreement. The P&I Clubs remained
free to offer, either on their own or together with other P&I Clubs, any level
of cover above the minimum level. The Commission held that such arrange-
ment was necessary for the functioning of the system envisaged in the IGP
Agreement. Thus, the clause providing for a common level of cover did not,
in the view of the Commission, constitute a restriction of competition within
the meaning of Article 85(1).50
On the basis of the above reasoning, the Commission held that the restric-
tions on contractual freedom imposed on the parties to the IGP Agreement
in all the three cases identified above were all ancillary to the Agreement in

47
In Decision 80/917/EEC of 3.10.1980 (National Sulphuric Acid Association), the
Commission found that a joint buying pool for the purchase of sulphur, set up by an associa-
tion grouping all manufacturers of sulphuric acid in the United Kingdom, was restrictive of
competition. In that case the collective purchasing agreement was exempted, inter alia, because
it ensured a steady supply of sulphur in times of shortages and because the members of the pool
were not obliged to make all their purchases of sulphur through the pool, see OJ L 260/24.
48
Decision, para. 84.
49
Decision, para. 77.
50
Decision, paras. 78–79.
328 dimitrios christodoulou

ensuring its proper functioning. Since the IGP Agreement was necessary for
the provision of insurance, the Commission came to the conclusion that those
restrictions did not violate EC competition rules.51

B. The Commission’s Decision Regarding the IG Agreement

The Commission identified three cases of IG Agreement provisions which
might be problematic from the point of view of competition law. Those were
the provisions regarding (1) the quotation procedure, (2) the rules on mini-
mum cost for tankers and (3) release calls.
i) Provisions Regarding the Quotation Procedure and its Sanctioning
The IG Agreement limits the freedom of P&I Clubs to quote rates to ship-
owners for risks from the operation of vessels already entered in other clubs in
order to attract them. The rate is the contribution which a vessel makes to the
different elements of the cost of claims borne by the P&I Club which insures
the vessel. Such cost includes: (a) the cost of claims to be faced by the insuring
P&I Club under the retention level including any external costs (such as the
costs of independent agents, correspondents, lawyers and surveyors); (b) the
cost of claims to be reinsured by other clubs through the IGP Agreement; and
(c) the cost of reinsurance through the Group General Excess Loss Reinsurance
Contract.52 However, it is noted that the internal administrative costs of the
insuring P&I Club remain outside the quotation procedure.
For a transfer of membership from one P&I Club to another to be approved
by the members of the International Group, the IG Agreement provides for
a procedure to be observed between the insuring P&I Club (the “Holding
Club”) and the new P&I Club (the “New Club”). The procedure varies
depending on whether there is a legally binding agreement between the
operator-shipowner of a vessel and the New Club for the extension of insur-
ance cover from the 20th February of the next year53 or there is only a non-
binding expression of intent thereto.54
The incentive for the members of the IG Agreement to observe the proce-
dure set out therein is great indeed. According to the IG Agreement, P&I

51
Decision, para. 74. See Mastromanolis, Em., The Drafting of Common Terms and other
Anticompetitive Practices in the Marine Insurance Market, in Aegean University, Shipping and
Marine Insurance, Athens 2007, 241, at p. 272 (in Greek). On the issue of ancillary restrictions
see generally Bellamy & Child, op. cit., p. 173. Also, Perakis, Ev., “Ancillary” Restrictions of
Competition, in Issues of Theory and Practice of Commercial Law, Athens 2004, 363 (in
Greek).
52
IG Agreement Cl. 6.2.
53
IG Agreement Cl. 2.1.
54
IG Agreement Cl. 3.
 protection & indemnity clubs and competition 329

Clubs which do not observe the procedure shall not be reinsured through the
IGP Agreement except (a) for Overspill Liability and (b) through the General
Excess Loss Reinsurance Contract, only for insured losses exceeding the
amount of 150 million US dollars. Any insured losses below that amount shall
be borne by the clubs, which will have either to finance them out of their own
reserves or, in relation to them, seek reinsurance cover elsewhere.55 The dura-
tion of such a draconian sanction is two years.56
Taking into account that the majority of insured losses do not exceed the
amount of 150 million US dollars,57 a New Club which does not follow the
procedure set out in the IG Agreement ceases, in effect, to benefit from the
IGP Agreement for a period of 2 years.
Despite the restriction on competition which the quotation procedure
above and the draconian penalty for non-conformity with it entails, the
Commission held that such a quotation procedure did not violate the EC
competition rules. The reason was that it was considered inherent to the
functioning of the IGP Agreement. According to the Commission: “ No club
would be ready to share claims with another club that would be offering a
lower rate for covering these same claims. No customer would remain with
the first club because it would know that it could obtain from the second club
exactly the same cover, covered also by all the P&I Clubs, but for a lower
rate”.58 It is at this point that the supplementary and facilitating role of the IG
Agreement in relation to the IGP Agreement becomes apparent.
On the other hand, it could be argued that by excluding the administrative
costs of P&I clubs from the calculation of the cost of claims the rules on the
quotation procedure do promote competition among P&I Clubs with a view
to lowering their administrative costs.
ii) Rules on Minimum Cost for Tankers
As far as tankers are concerned the IG Agreement goes one step further. The
International Group issues every year a recommendation on the reasonable
minimum provision to be made for claims covered under the IGP Agreement
in rating tankers.59 Where a P&I Club does not follow such recommendation
but offers candidate assureds (or existing members) a lower rate which, under
the circumstances, is considered inadequate to cover the risk relating to the
operation of the specific vessel it faces the following sanction: for the insured

55
IG Agreement Cl. 9.3.
56
IG Agreement Cl. 9.2.
57
See above text at section I.3.
58
Decision, para. 89.
59
IG Agreement Cl. 12.2.
330 dimitrios christodoulou

risks relating to that vessel and for a period of one year,60 the P&I Club cannot
rely on reinsurance through the IGP Agreement except (a) for Overspill
Liability and (b) through the General Excess Loss Reinsurance Contract only
for insured losses exceeding the amount of 150 million US dollars. Insured
losses below that amount are to be borne by the P&I Club itself which will
have either to finance them out of its own reserves or seek reinsurance
elsewhere.61
Such penalty is imposed unless the P&I Club proves before a committee
that when quoting the rate in question it made fair and adequate evaluation
of the three elements of cost above,62 and the rate in question is justified in
view, for example, of the low general costs of that P&I Club.
The Commission held that the quotation procedure regarding tankers
could be justified in view of the specific characteristics of tanker risks. Indeed,
tanker risks are normally of a catastrophic nature, tending to occur rarely but
involving very large liabilities when they do occur.63
iii) Release Calls
When a shipowner leaves his club he is liable for a share of the liabilities
incurred by the club during the years of his membership, even if, at the
moment of leaving, these liabilities are still undetermined.64 Such liability, if
any, is usually covered by what is called a “release call”. The shipowner, how-
ever, may request and the Holding Club has to accept in lieu of a release call
a guarantee given or confirmed by a bank acceptable to the Holding Club for
the shipowner’s liability to pay future calls.
The Commission held that the rules relating to release calls were inherent
in the proper functioning of the IGP Agreement because they prevented a
shipowner leaving its club from avoiding paying the sums still owed to cover
the liabilities incurred during that shipowner’s membership but not yet settled
at the time of withdrawal. In any case, if the shipowner considers the release
call unreasonably high, he can appeal to an expert committee.65
Regarding the IG Agreement, the Commission held that only the provi-
sions regarding the quotation procedure and the recommendation for the
minimum rate for tankers constituted restrictions on competition which fell
within the scope of Article 81(1) of the Treaty, provided they applied for the

60
The one year period starts at 12 noon GMT on the sixteenth day after the P&I Club is
notified of the Committee’s decision, see IG Agreement Cl. 12.4.
61
IG Agreement Cl. 12.4.
62
IG Agreement Cl. 12.1.
63
Decision, para. 91.
64
IG Agreement Cl. 8.1.
65
IG Agreement Cl. 8.1(b).
 protection & indemnity clubs and competition 331

amount of the retention.66 However, the Commission held that those restric-
tions were inherent in the functioning of the IG Agreement and thus it granted
an exemption based on Art. 81(3).67

C. The Commission’s Decision on the Issue of the Abuse of Dominant Position

After examining the relevant market, the Commission found that the mem-
bers of the International Group did collectively hold a dominant position in
the market for P&I insurance. That was so because there were strong eco-
nomic links between the members of the International Group since they par-
ticipated in the IGP Agreement and together they held a market share
representing 89% of the world fleet.68
In reaching such a conclusion, the Commission took into consideration
also the following facts: (a) that the difference in size between the market share
of the International Group and the market share of independent competitors
was great indeed; (b) that the International Group could behave to a large
extent independently of its competitors because it had the capacity to offer
all levels of protection and indemnity cover, whereas its competitors did not;
(c) that the International Group had wide experience and reputation through
having offered P&I insurance for around one hundred years; and (d) that the
International Group had a presence all over the world through a wide network
of correspondents.69
Further, the Commission considered the issue whether there was any abuse
of the dominant position by the members of the International Group (a) in
setting a single level of cover for Overspill Liability offered and, thus, limiting
the products offered to the market, and (b) in providing reinsurance on dis-
criminatory terms.
The Commission held that there was no abuse of a dominant position by the
International Group, because, on the one hand, the limit for Overspill Liability
was not only low but also commercially reasonable and, on the other hand,
because the IG Agreement set transparent and objective procedures for the

66
Decision, para. 102.
67
Decision, Art. 3.
68
Decision, para. 124. See Hoffmann-La Roche v Commission, [1979] ECR 461 para. 41:
“although the importance of the market shares may vary from one market to another, the view
may legitimately be taken that very large market shares are in themselves, and save in excep-
tional circumstances, evidence of the existence of a dominant position”. See also Case C-62/86,
AKZO Chemie BV v. Commission, [1991] ECR I-3359 para. 60.
69
Decision, paras. 125–126 citing Hoffmann-La Roche v Commission, [1979] ECR 461
para. 42. For an analysis of the factors contributing to the coordination of behavior leading to
collective dominant position in an oligopoly, see Tzouganatos, D., Oligopoly and Collective
Dominant Position in Competition Law, Athens 2004, pp. 16–32 (in Greek). Bellamy & Child,
op. cit., p. 947 et seq.
332 dimitrios christodoulou

extension of reinsurance coverage to P&I Clubs which were not members of

the International Group, as well as to profit-making (commercial) insurers.70

III. The Position Post-: The Issue of the Validity of the IGP
Agreement and the IG Agreement

The issue of the validity of the two Agreements from the point of view of
competition law is due to revive at the expiry of the exemption on 20 February
2009. The economic analysis and the reasoning, on the grounds of which the
Commission granted the exemption, can provide useful guidance in address-
ing the position after the expiry of the exemption. First, however, it is sug-
gested that a brief analysis is needed of the legal framework within which the
two Agreements will function after the expiry of the exemption.

1. The Legal Framework

After Regulation 1/2003 came into force, agreements, decisions and concerted
practices caught by Art. 81(1) of the Treaty, which do not satisfy the condi-
tions of Art. 81(3) of the Treaty, are prohibited, no prior decision to that effect
being required.71 On the other hand, agreements, decisions and concerted
practices caught by Art. 81(1) of the Treaty, which satisfy the conditions of
Art. 81(3) of the Treaty, are not prohibited, no prior decision to that effect
being required.72 Consequently, the International Group and its members
assume the risk deriving from the continuing application of the two Agreements
after the expiry of the exemption, in case such Agreements were found to be
caught by Art. 81(1) of the Treaty, without satisfying the conditions of Art.
81(3) of the Treaty.
In addition, Commission Regulation 358/2003 on the application of
Article 81(3) of the Treaty to certain categories of agreements, decisions and
concerted practices in the insurance sector has come into force.73 According to
Commission Regulation 358/2003, the term “Co-reinsurance groups” means

70
Decision, para. 127.
71
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the
rules on competition laid down in Articles 81 and 82 of the Treaty OJ L 1, 4.1.2003, p. 1–25,
Art. 1(1).
72
Id. Art. 1(2). See, however, Art. 21 of Greek Law 703/1977.
73
Pursuant to Council Regulation (EEC) No 1534/91, the Commission adopted Regulation
(EEC) No 3932/92 of 21 December 1992 on the application of Article 85(3) of the Treaty to
certain categories of agreements, decisions and concerted practices in the insurance sector OJ L
053, 28/02/2003 p. 0008 – 0016. Regulation (EEC) No 3932/92, expired on 31 March 2003.
Commission Regulation (EC) No 358/2003 of 27 February 2003 on the application of Article
81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the
insurance sector is the successor of Regulation 3932/1992.
 protection & indemnity clubs and competition 333

groups set up by insurance undertakings, possibly with the assistance of one

or more re-insurance undertakings in order (a) to reinsure mutually all or part
of their liabilities in respect of a specified risk category and (b) incidentally to
accept, in the name and on behalf of all the participants, the reinsurance of
the same category of risks.74
Co-reinsurance groups which have been in existence for over three years or
have not been specifically created in order to cover a new risk are exempted as
long as Commission Regulation 358/2003 remains in force, on the condition
that the insurance products underwritten within the grouping arrangement
by the participating undertakings or on their behalf do not, in any of the
markets concerned, represent more than 25 % of the relevant market.75
Since the IGP Agreement provides for mutual reinsurance and the collective
purchase of reinsurance through the Group General Excess Loss Reinsurance
Contract, the International Group falls within the scope of the groups of co-
reinsurance. As has already been said, the insurance products offered in the
relevant market by the members of the International Group far exceed the
limits set by Commission Regulation 358/2003, since they cover nearly 90%
of the world tonnage.
Could the foregoing lead to the conclusion that at the expiry of the exemp-
tion granted by the Commission the two Agreements in question would or
should be held illegal?
It is suggested that the reasoning of the Commission contained in the Deci-
sion, as outlined above, may provide useful guidance in answering this question.

2. The IGP Agreement and the IG Agreement Remaining in Force as a Necessary

Condition for the Provision of Insurance Cover in the Relevant Market
Effectively, the International Group acts as a giant Protection and Indemnity
Club. Its members are P&I Clubs which mutually reinsure insured risks
according to the IGP Agreement and mutually cover the cost of the Group
General Excess Loss Reinsurance Contract. Therefore, the IGP Agreement
results in an unparalleled distribution of risks relating to the protection and
indemnity insurance. The distribution of risks is truly global because the risk
is distributed among the members of the International Group whose market
share is nearly 90% of the world tonnage.
In essence, the IGP Agreement gives depth and increases the capacity of the
market for P&I insurance. Such distribution of risk results in drastic reduc-
tion of the cost of reinsurance and, consequently, of the cost of insurance itself
to the benefit of the assureds, i.e. shipowners, charterers and operators and,

74
Commission Regulation (EC) No 358/2003 of 27 February 2003, Art. 2(6).
75
Id. Art. 7(1), (2)(b).
334 dimitrios christodoulou

ultimately, to the benefit of the consumer of the services which shipowners

and operators provide.
At this point the question may be raised whether there could be two or even
more economically viable competing groups for reinsurance in the market for
protection and indemnity insurance. Such question cannot be answered a
priori and in abstracto. On the contrary, it is a matter which can only be
addressed a posteriori, that is to say, on the basis of economic analysis and in
view of the capacity of the relevant insurance market. In other words, the issue
could only be addressed by examining the ability to tie up capital on the one
hand and the will and ability to pay the necessary premium on the other hand.
It is the problem of insurability of risks.76
A risk is, generally, deemed insurable if the insurers can set a premium which
both reflects the risk and enables them to make a profit.77 Another important
point, however, is that insurance be provided to shipowners at a reasonable
cost.78 Therefore, the capacity of the insurance market and the cost of insurance
should be taken into account. Thus, it would seem that the cost of insurance
has risen since 1999, when the Commission examined the two agreements in
question. This becomes apparent when the amount of retention set in the 2007
version of the IGP Agreement (7 million US dollars) is compared to the
amount which the Commission examined in 1999 (5 million US dollars). On
the other hand, it would seem that the capacity of the insurance market has
decreased, since the amount of cover for overspill liability has decreased from
4.25 billion US dollars in 1999 to 3.05 billion US dollars in 2007.
From an economic point of view, the extent of cover tends to increase while
the cost of the insurance coverage tends to decrease, as long as more persons
are covered. Smaller size would result in increased costs, in the form of higher
premiums or, in the case at hand, in the form of higher calls. That could be
commercially unrealistic.
After careful examination of the market, the Commission concluded that
the provision of insurance cover at the extent afforded by the IGP Agreement

76
See Christodoulou, D., The Single Ship Company-The Legal Consequences from its Use
and the Protection of its Creditors, Publications of the Hellenic Institute of International and
Foreign Law Vol. 23, Athens-Komotini 2000, p. 185 et seq. Also see Athanassiou, L., op. cit., at
p. 122 et seq.
77
Kunreuther, H., Rethinking Society’s Management of Catastrophic Risks, 22 The Geneva
Papers on Risk and Insurance 151 (1997), at p. 152. See also Giarini, O., Insurability and the
Economic Relevance of Insurance: A Historical Economic Perspective, 20 The Geneva Papers
on Risk and Insurance 419 (1995), at p. 422; Gollier, Chr., About the Insurability of Catastrophic
Risks, 22 The Geneva Papers on Risk and Insurance 177 (1997).
78
See Buglass, L., Limitation of Liability from a Marine Insurance Point of View, [1979] 53
Tul.L.Rev. 1364; Coghlin, T., Shipowners’ Liabilities Fifty Years On, 22 JMLC 415 (1991), at
p. 417.
 protection & indemnity clubs and competition 335

was possible only if at least 50% of the world tonnage was so covered.79 The
Commission named that percentage as the required “minimum dimension” of
the relevant market.
It should be remembered that the Commission linked the exemption,
which it granted, to the fact that the IGP Agreement would remain necessary
for the provision of insurance coverage.80 Insofar as that remained true, the
IGP Agreement could not be held illegal. It is submitted that the same will
apply after the expiry of the exemption. Therefore, to the extent that the IGP
Agreement continues to be necessary for the provision of insurance cover, it
cannot be held to violate the EC competition rules.
Thus, it is submitted that, as long as the economic analysis and the capacity
of the insurance market indicate that the IGP Agreement is necessary for the
provision of insurance coverage, the IGP Agreement will not fall within the
scope of Art. 81(1) of the Treaty. Further, as long as it remains necessary for
the functioning of the IGP Agreement, the IG Agreement will fulfill the cri-
teria of Art. 81(3) of the Treaty.
The Commission has followed the above line of reasoning also in other
cases of agreements among insurers, such as the case of three nuclear insurance
pools (a Swedish co-insurance and co-reinsurance nuclear pool, an Italian
reinsurance nuclear pool and a Spanish pool providing co-insurance to nuclear
installations in Spain and co-reinsurance to nuclear risks outside Spain).81
The same line of reasoning was followed by the German competition
authority when, in 2003, it prohibited four insurance companies from con-
tinuing to insure jointly the pecuniary loss liability risks of auditors and char-
tered accountants via the insurers’ pool. The insurance companies concerned
offered pecuniary loss liability insurance only via the insurers’ pool when each
could have provided such insurance coverage alone. The result was that insur-
ance cover was, thus, made available only at standard premiums and terms
and that, consequently, there was no competition among the insurers either
for insurance premiums and conditions or for service quality in claims process-
ing.82 Such a result was rightly held as breaching the law.

79
Decision, paras. 72–74.
80
See Decision, para. 117.
81
See Cases COMP/37.363 Svenska Atomforsakrngspoolen, COMP/34.985 Pool Italiano
Rischi Atomici and COMP/34.558 Aseguradores Riesgos Nucleares, see XXXIst Report on
Competition Policy (2001), para. 7.2, p. 63.
82
DG Competition Consultation Paper concerning the review of the functioning of
Commission Regulation (EC) No 358/2003 on the application of Article 81(3) of the Treaty
to certain categories of agreements, decisions and concerted practices in the insurance sector, at
p. 14. The Consultation Paper can be found in http://ec.europa.eu/comm/competition/sectors/
financial_services/insurance.html.
336 dimitrios christodoulou

IV. Concluding Remarks

Protection and indemnity insurance is one of the pillars of shipping world-

wide. The insurance coverage so provided affects everybody, if only one takes
into consideration, for example, that P&I insurance covers shipowners’ liabil-
ity for damage to the environment.83 In some cases, such as the case of the
carriage of oil as cargo, the insurance of the shipowners’ liability is compulsory
and it is provided by P&I Clubs. As has been stated, “public policy mandating
that insurance coverage be obtained as a condition for engaging in certain
activities necessarily demands that the required insurance be available in the
market”.84 However, the public has a strong interest in certain kinds of insur-
ance, especially liability insurance, even if the coverage is not required by law.
Thus, the availability of insurance is important.
The availability of insurance depends, however, on the cost at which it is
provided for and on the capacity of the insurance market. For some time now,
it has been argued that it has become more expensive to insure liabilities than
to insure property because liability claims have become more numerous and
larger than property claims.85 Therefore, agreements and practices which facil-
itate the provision of protection and indemnity insurance coverage, among
other things by reducing the cost of insurance or by increasing the capacity of
the insurance market, must, each time, be seen positively. Whether such agree-
ments and practices conform to competition rules is an issue which should,
therefore, be examined ad hoc by taking into account the circumstances of
each particular case and having, each time, in mind the benefit of the con-
sumer and the limits of the insurance market.

83
To that effect see European Parliament Resolution B4-0413 OJ C17720 (1996).
84
Pfennigstorf, W., Public Law of Insurance, op. cit., p. 132.
85
Coghlin, T., Shipowners’ Liabilities Fifty Years On, op. cit., at p. 417.
ADVANTAGES AND DISADVANTAGES OF THE PARALLEL FLAGS
IN AN INTERNATIONAL SHIPPING CONTEXT

Xosé Manuel Carril-Vázquez*

I. Methodological Clarifications
II. Terminological Clarifications about “Parallel Flags”
III. The Precariousness of EU Social Law on “Parallel Flags”
IV. Domestic Law of EU Member States on “Parallel Flags”: Advantages and
Disadvantages to the States, Sea-Employers and Sea-Workers
V. Critical Conclusions

I. Methodological Clarifications

First, this chapter is a strictly legal one. In other words, it does not deal with
“parallel flags” from any economic, sociological, psychological, philosophical,
metaphysical or similar viewpoints. Obviously, it is very hard to put into
words what the Law (or even justice) is. But I am a Galician, and we in
Galicia—id est, North-western Spain—are practical men. And from this prac-
tical approach, it is clear to me what the Law can be. The Law is not any spirit
or abstraction, but a real thing that you can see, that you can touch and that
you can read. And this real thing which formalizes the Law is divided into two
very concrete elements: statutes (and, therefore, the so-called statutory Law,
sometimes collected into codes) and judicial decisions (or so-called case law in
a broad sense, usually contained in court reports).1 In a nutshell, to avoid
perplexities, I discuss statutes and judicial and quasi-judicial decisions on the
subject of “parallel flags”.
With this important scientific limitation, I think it is also necessary to point
out that I approach the subject from a labour or social legal viewpoint. This
social background comes to me through two different channels: first, I am an
Ordinary Professor on Labour and Social Security Law at the School of Law
of one public Galician University,2 and as such I am obliged mainly to consider

* Professor of Labour Law and Social Security Law, School of Law, University of A
Coruña.
1
See Martínez Girón, J., Arufe Varela, A. & Carril Vázquez, X.M., Derecho del Trabajo, 2a
ed., Netbiblo, A Coruña, 2006, p. 15–26.
2
For more information on my University, visit http://www.udc.es.
338 xosé manuel carril-vazquez
xose carril-vázquez

the legal position of workers and unions; and, secondly, I am also a unionist.
The name of my union is, in English, Galician Interunion Confederation—
one of the four most representative unions existing in Spain—which includes
a sea workers’ federation.3 Some of my modest publications deal with labour
conditions and employment in the maritime sector, starting with my doctoral
thesis (written in the University of A Coruña).4
On this basis, I will discuss first the meaning of the expression “parallel flags”,5
which is in my opinion a euphemistic one referring to the non-traditional
national shipping registers. Then, I will face the special problems connected to
this peculiar kind of flag and arising under the Social Law of the European
Union,6 on the one hand; and under the domestic legislation of at least seven
Member States of the European Union (Denmark, Germany, Portugal, Spain,
Italy, France and the United Kingdom),7 on the other hand. From the viewpoint
of the advantages and disadvantages of these so-called “parallel flags”, my con-
clusion will be critical of this kind of flag from the viewpoint of Social Law or
Labour Law, since its existence represents advantages to only States and ship-
owners, in the framework (with the corresponding disadvantages) of a real legal
underworld for the workers employed in ships flying such colours.8

II. Terminological Clarifications about “Parallel Flags”

To me it is clear that the expression “parallel flags” is not a legal one, since it does
not appear to have been used in either statute law or case law relating to the
subject. On this subject, the traditional legal expression is ‘flags of conven-
ience’.9 In this sense, it is enough to cite some documents of the International
Labour Organization (ILO), expressly employing such an expression, as in the
case of the Merchant Shipping (Minimum Standards) Convention, num. 147
of 1976, the preamble to which refers to vessels “registered under flags of con-
venience”,10 although the ILO expressly recognizes that “the registration of ves-
sels in countries other than the nationality of their owners has always presented

3
In order to get more information on this Galician trade union, visit http://www.galizacig
.com.
4
La Seguridad Social de los Trabajadores del Mar, Civitas, Madrid 1999.
5
See, infra, section II.
6
See, infra, section III.
7
See, infra, section IV.
8
See, infra, section V.
9
On this legal traditional expression, see Carril Vázquez, X.M., Aspectos laborales y de
seguridad social de los pabellones de conveniencia [2001]108 Revista Española de Derecho del
Trabajo 909–927.
10
Para. 4.
 advantages and disadvantages of the parallel flags 339

the industry, lawyers and academics with a problem of terminology concerning

such terms as open registry, flags of convenience and second and international
registers”.11 Obviously, “flags of convenience” is a legal expression currently
having a net pejorative meaning, evidenced—in European Union law—by
Commission Communication C(2004) 43 on Community guidelines on State
aid to maritime transport,12 a very interesting document saying, among other
things, “since the 1970s the European fleet has been faced with competition
from vessels registered in third countries which do not take much care to observe
social and safety rules in force at international level”.13 Always in my opinion,
this new expression “parallel flags” can be used to allude to the non-traditional
or non-first shipping registers ruled by States of the so-called first world (and
therefore, ruled by Member States of the European Union), under many differ-
ent expressions, such as the following ones used in official documents of the
European Union (in a sense opposite to “traditional national registers”): (1)
“open national registers”, id est, those which “do not impose particularly strict
requirements for registration, and it is relatively easy to establish a ‘genuine’ link
with the flag State”, existing in “countries, such as Cyprus and Malta”, although
“such registers also exist in some parts of Member States, including the Canary
Islands, Gibraltar and the Netherlands Antilles”; (2) “second (offshore) regis-
ters”, id est, those having “a high degree of flexibility with regard to the employ-
ment conditions of crews (a high percentage of crew members may be
non-nationals of the flag State)”, and they “may be found in Bermuda, the
Cayman Islands and the Isle of Man (United Kingdom), the Kerguelen Islands
(France), the Netherlands Antilles (Netherlands), Luxembourg, Belgium and
the Faroe Islands (Denmark)”; and (3) “international registers”, id est, those in
which “the conditions governing management and crew are strict, but not as
strict as those laid down in the original national registers”, as in the case of “the
Danish international register” or “the German register”.14

III. The Precariousness of EU Social Law on “Parallel Flags”

Obviously, there exist some social law of the European Union about ‘parallel
flags’, not only at the statutory level, but also at the level of case law. This is

11
See ILO, Supplementary paper to Reports I and II submitted for discussion at the Meeting
of Experts on Working and Living Conditions of Seafarers on board Ships in International
Registers, International Labour Office, Geneva 2002, p. 1.
12
OJ 2004 C 13, 17.1.2004.
13
Page 3, para. 3.
14
See McKenna, P., Report on the role of flags of convenience in the fisheries sector,
20 November 2001, ref. A5-0405/2001, p. 17 (www.europarl.europa.eu/sides/getDoc
.do?pubRef=-//EP//NONSGML+REPORT+A5-2001-0405+0+DOC+WORD+V0//EN).
340 xosé manuel carril-vázquez

represented by the Judgment of the European Court of 17 March 1993 (Cases

C-72/91 and C-73/91 Firma Sloman Neptun Schiffahrts AG v Seebetriebsrat
Bodo Ziesemer der Sloman Neptun Schiffahrts AG ).15 But this judgment is very
disappointing from a social viewpoint, since it declares - relating to the
German International Register (in the original German, Internationale
Seeschiffahrtsregister, or ISR) - that “a system established by a Member State,
such as that applicable to the ISR, which enables contracts of employment
concluded with seafarers who are nationals of non-member countries and
have no permanent abode or residence in that Member State to be subjected
to working conditions and rates of pay which are not covered by the law of
that Member State and are considerably less favourable than those applicable
to seafarers who are nationals of that Member State, does not constitute State
aid within the meaning of Article 92(1) of the EEC Treaty and that Article
117 of the Treaty does not preclude the application of a system of that kind”.16
This decision has been much discussed in the legal social literature. At the
statutory level, it has also been considered in the most recent activities of the
European Commission (namely, its Decision C (2003) 92 of 4 February 2003,
relating to the second register of Portugal,17 and its Decision C (2004) 2683
of 17 July 2004, relating to the second register of Italy).18
At the level of the secondary legislation of the European Union, the social
law of the Union is also disappointing. On the basis that the so-called “classi-
cal” Labour Directives exclude expressly from their scope shipowners and sea
workers19—and it is also the case for the Directive on transnational provision

15
Notes relating to the decision in Lewis, X., The Employment of Foreign Seamen on Board
Vessels of a Member State [1993] 22 ILJ 235–239.
16
No. 29.
17
See http://ec.europa.eu/community_law/state_aids/transports-2002/n222-b-02.pdf.
18
See http://ec.europa.eu/community_law/state_aids/transports-2004/n045-04.pdf.
19
See Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws
of the Member States relating to the protection of employees in the event of the insolvency of
their employer (OJ L 283, 28.10.1980), Article 1.3.b (“… Member States may continue to
exclude from … share-fishermen”); Council Directive 94/45/EC of 22 September 1994 on the
establishment of a European Works Council or a procedure in Community-scale undertakings
and Community-scale groups of undertakings for the purposes of informing and consulting
employees (OJ L 254, 30.9.1994), Article 1.5 (“Member States may provide that this Directive
shall not apply to merchant navy crews”); Council Directive 98/59/EC of 20 July 1998 on the
approximation of the laws of the Member States relating to collective redundancies (OJ L 225,
12.8.1998), Article 1.2.c (“This Directive shall not apply to: […] the crews of seagoing ves-
sels”); Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of
the Member States relating to the safeguarding of employees’ rights in the event of transfers of
undertakings, businesses or parts of undertakings or businesses (OJ L 82, 22.3.2001), Article
1.3 (“This Directive shall not apply to seagoing vessels”); and Directive 2002/14/EC of the
European Parliament and of the Council of 11 March 2002 establishing a general framework
for informing and consulting employees in the European Community–Joint declaration of the
 advantages and disadvantages of the parallel flags 341

of services20— the social law of the European Union relating to “parallel flags”,
although only implicitly alluded to, is represented by the two following norms:
(1) Council Directive 1999/63/EC of 21 June 1999 concerning the Agreement
on the organization of working time of seafarers concluded by the European
Community Shipowners’ Association (ECSA) and the Federation of Transport
Workers’ Unions in the European Union (FST);21 and (2) Directive 1999/95/
EC of the European Parliament and of the Council of 13 December 1999
concerning the enforcement of provisions in respect of seafarers’ hours of
work on board ships calling at Community ports.22 According to the first of
these, the hours of work of sea workers are not minimum standards, but
merely guiding conditions,23 since the limits established by it may be calcu-
lated on an average of “24 hours” or “seven days”,24 and the minimum hours
of rest may be also calculated by applying the same average hours or days;25 all
of which explains that the Directive declares that the normal working hours
standard of seafarer is, in principle, based on an eight-hour day with one day
of rest per week and rest on public holidays”.26
Theoretically, again at the secondary legislation level, Council Directive
95/21/EC establishing a system of port State control of shipping in the
European Community based on uniform inspection and detention proce-
dures27 is more interesting, since it is also applicable to conditions of employ-
ment other than the hours of work. Indeed, it declares that “the purpose of
this Directive is to help drastically to reduce substandard shipping in the
waters under the jurisdiction of Member States by”, among other means,
“increasing compliance with international and relevant Community legisla-
tion on maritime safety, protection of the marine environment and living and
working conditions on board ships of all flags”.28 But the working conditions

European Parliament, the Council and the Commission on employee representation (OJ L 80,
23.3.2002), Article 3.3 (“Member States may derogate from this Directive through particular
provisions applicable to the crews of vessels plying the high seas”).
20
See Directive 96/71/EC of the European Parliament and of the Council of 16 December
1996 concerning the posting of workers in the framework of the provision of services (OJ L 18,
21.2.1997), Article 1.2 (“This Directive shall not apply to merchant navy undertakings as regards
seagoing personnel”).
21
OJ L 167, 02.7.1999.
22
OJ L 014, 20.1.2000.
23
On the organization of working time at the level of European secondary legislation, with
these same features, see Martínez Girón, J., Arufe Varela, A. & Carril Vázquez, X.M, op. cit.,
77–179.
24
Clause 5.1.a.
25
Clause 5.1.b.
26
Clause 4.
27
OJ L 157, 7.7.1995.
28
Article 1.
342 xosé manuel carril-vázquez

in question are, according to the Directive, the conditions regulated in the

Merchant Shipping (Minimum Standards) Convention, 1976 (ILO No
147);29 and, according to this ILO Convention, each Member State which
ratifies it merely “undertakes … to have laws or regulations laying down, for
ships registered in its territory … appropriate social security measures”,30 and
also “to exercise effective jurisdiction or control over ships which are registered
in its territory in respect of… social security measures prescribed by national
laws or regulations”.31

IV. Domestic Law of EU Member States on “Parallel Flags”:

Advantages and Disadvantages to the States, Sea-Employers
and Sea-Workers

In view of the fluidity of EU social law on “parallel flags”, the only thing to do
is to appeal to the domestic legislation of each Member State. In the European
Union, the following seven countries have similar legislation on parallel flags:
(1) Denmark, keeping in mind that the Danish International Ship Register
(Dansk Internationalt Skibsregister) was established by an Act of Parliament in
1988, Act No. 408 of 1 July;32 (2) Germany, with its register, named German
International Register (in the original German, Internationale Seeschiffahrt-
sregister, or ISR), introduced by the Gesetz zur Einführung eines zusätzlichen
Registers fuer Seeschiffe unter der Bundesflagge im internationalen Verkehr (Law
on the introduction of an additional shipping register for ships flying the
Federal German flag in international trade) of 23 March 1989;33 (3) Portugal,
having its Registo Internacional de Navios de Madeira (MAR), regulated in
Decree-Law No. 96/1989 of the 28th March;34 (4) Spain, the parallel flag of
which is regulated by Act No. 27/1992 of 24 December, regulating the ports
of the State and merchant shipping,35 according to which “a special register
of ships and shipping enterprises is created”,36 located “at the territory of

29
Article 2.1.
30
Article 2.a.ii.
31
Article 2.b.ii.
32
See “Denmark” in ILO, Reports II. Report on an ILO investigation into living and work-
ing conditions of seafarers. Report for discussion at the Meeting of Experts on Working and
Living Conditions of Seafarers on board Ships in International Registers: Case studies,
International Labour Office, Geneva, 2002, p. 8. In order to get more information, visit http://
www.dma.dk.
33
Bundesgesetzblatt I (1989), p. 550.
34
Diário da República-I Série, N.° 72, 28.3.1989. In order to get more information, visit
http://www.sdmadeira.pt/.
35
Boletín Oficial del Estado, 25.11.1992.
36
Schedule number 15.1.1.
 advantages and disadvantages of the parallel flags 343

the Autonomous Community of the Canary Islands”;37 (5) Italy, having its
register (named Registro Internazionale) actually regulated in Act No. 30 of
27th February 1998;38 (6) France, where the law applicable to the subject is
Act No. 2005-412 of the 3rd May 2005 relating to the creation of the French
International Register (Registre International Français);39 and (7) the United
Kingdom, where the Merchant Shipping Act 1995 (c. 21)40 contains a “regu-
lation of registration in British possessions by reference to categories of regis-
tries”.41 In my opinion, it is possible to make the following remarks about
these seven domestic legislations, always from the social point of view.
First, Denmark was condemned by the ILO Committee on Freedom of
Association, by reference to ILO Conventions No. 87 and 98,42 being also
remarkable that the individual contract of employment between sea employer
and sea worker apparently allows for so-called “free dismissal” with notice, in
stating that “unless you have agreed otherwise, you or the shipowner may
terminate your agreement by giving the other 7 days’ notice”.43 Then, the
German legislation states that “for the purposes of Article 30 of the Introductory
Law to the Civil Code and subject to the provisions of Community law, the
contracts of employment of crew members of a merchant ship registered in
the ISR who have no permanent abode or residence in Germany shall not be
governed by German law merely on account of the fact that the ship is flying
the Federal German flag”,44 and we must remember the precariousness of the
social law of the European Union on the subject.45 Portugal’s domestic legisla-
tion states that “the hiring and the working conditions of the crews only take

37
Schedule number 15.1.2. See Del Pino Domínguez Cabrera, M., El registro especial de
buques de Canarias [2004] 2 Revista Electrónica del Departamento de Derecho de la Universidad
de la Rioja 99–122. For more information, visit http://www.rif.mer.equipement.gouv.fr/.
38
Gazzeta Ufficiale della Repubblica Italiana, 28.2.1998.
39
I have used the consolidated text of this Act from www.legifrance.gouv.fr.
40
I have used this Act through www.statutelaw.gov.uk.
41
See section 18.
42
See, in http://www.ilo.org/ilolex/english/index.htm, ILO, Complaints against the govern-
ment of Denmark presented by the Danish Federation of Trade Unions (LO), the Danish
Seamen’s Union and several other Danish Trade Union Federations. Report No: 262 Case(s)
No(s): 1470. Here, this ILO Committee declared: “the Committee takes note of the explana-
tions given by the Government on the economic difficulties facing the Danish Merchant
Marine. However, it considers that section 10 (2) and (3) of the Act of 23 June 1988 to set up
a Danish International Ship’s Register constitutes interference in the seafarers’ right to volun-
tary collective bargaining and amounts to government interference in the free functioning of
organizations in the defence of their members’ interests which is not in conformity with the
spirit of Conventions Nos. 87 and 98”.
43
See, in http://www.seamenschurch.org/CSR%20Website/d.htm, the document “Seafarers
Rights On Danish International Registry (DIS) Ships”, p. 4.
44
§ 21 (4) of the Gesetz über das Flaggenrecht der Seeschiffe und die Flaggenfünhrung der
Binnenschiffe (Flaggenrechtsgesetz).
45
See supra, para. 5.
344 xosé manuel carril-vázquez

into account the international conventions on the subject in force in the

Portuguese Law”,46 so the ILO Convention No. 147 of 197647 is included. In
my country, the general rule is non-application of the Spanish labour and
social legislation to the crews of ships registered in the Canary Special Register,
since “the Labour and Social Security conditions of the non national workers
employed aboard the ships immatriculated in the special register should be
regulated by the legislation to which the parties freely agree, provided that it
accomplishes the normative originated in the International Labour
Organization”.48 In Italy—in the same line—the relevant legislation states
that “the labour relationship of the non-communitarian people non-resident
in the European Union, employed aboard the ships filed in the International
Register, will be regulated by the Act chosen by the parties, respecting the ILO
conventions on the subject of the sea employment”.49 In France, always in the
same de minimis rule, the relevant legislation states that “the conditions of
hiring, of employment, of labour and living aboard in a vessel filed in the
France International Register cannot be less favourable than the conditions
provided by the International Labour Organization Conventions ratified by
France”.50 And finally, with respect to the British “parallel flags”, it is enough
to point out that a 2002 ILO Report verifies—relating to the Isle of Man
Register—that “the Isle of Man Government is not currently fulfilling its obli-
gations in regard to recognizing the rights of bona fide trade unions to negoti-
ate terms and conditions”, that “the beneficial ownership and control of many
Isle of Man vessels has no relationship to the either the Isle of Man and the
nationality of the crews employed” and the “RMT [National Union of Rail,
Maritime and Transport Workers] officers have genuine concerns about two
significant problem areas”, which were “the jurisdictional hiatus of employ-
ment tribunals which was addressed under the legal section” and the “problem
with fraudulent qualifications”, since “it appears that qualifications, some
involving officers, can be purchased easily in some home countries without
examination or corresponding sea time”.51
Given this legal background, it is clear that the so-called “parallel flags”
have the same advantages for sea employers as the reviled “flags of convenience”

46
Article 22 of the Decree-Law, supra.
47
See supra II and III.
48
Schedule 15.7.
49
Article 3.2.
50
Article 13.
51
See “Isle of Man” in ILO, Reports II. Report on an ILO investigation into living and
working conditions of seafarers. Report for discussion at the Meeting of Experts on Working
and Living Conditions of Seafarers on board Ships in International Registers: Case studies,
International Labour Office, Geneva, 2002, p. 63.
 advantages and disadvantages of the parallel flags 345

rooted in countries and States outside the so-called first world.52 Indeed, sea
employers entered in such registers are wholly free to choose the social and
labour legislation applicable to their sea workers. The unique, and almost
subsidiary, legal limitation is marked by the standards set out by the
International Labour Organization Conventions in force, which merely
impose the generic obligation for the Member States ratifying them to enact
proper social legislation, but without making more specific provisions. On
the other hand, sea employers are encouraged to enter themselves in “parallel
flags”, because if the existence of a very favourable fiscal treatment of shipow-
ing companies.53 This encouragement is promoted by the corresponding
States, since this is the way of “contributing to the consolidation of the mari-
time cluster established in the Member States while maintaining an overall
competitive fleet on world markets”,54 and also of “maintaining and improv-
ing know-how and protecting and promoting employment for European sea-
farers”.55 But this last outcome, in exchange for the submission of sea workers
to a legal underworld in which they are considered as truly second class citi-
zens, burdened with the many disadvantages of the existence of this kind of
maritime register.56

V. Critical Conclusions

In view of this evident social impact—and in view, too, of the fact that the
so-called “classical” Labour Directives exclude expressly from their scope ship-
owners and sea workers—it is clear that the need for a specific regulation on

52
See ILO, The impact on seafarers’ living and working conditions of changes in the struc-
ture of the shipping industry. Report for discussion at the 29th Session of the Joint Maritime
Commission, Geneva, 2001, p. 17–24.
53
See the Commission Communication COM(2002) 203 final on the Fourth report on the
implementation of Council Regulation 3577/92 applying the principle of freedom to provide
services to maritime cabotage (1999–2000), 22–29 (http://eurlex.europa.eu/Notice.do?val=26
6720%3Acs&lang=en&list=266720%3Acs%2C&pos=1&page=1&nbl=1&pgs=10&hword
s). See also Fotinopoulou Basurko, O., La ocasionalidad en el ejercicio de la función pública
como criterio para descartar la excepción a la libertad de circulación de trabajadores del art.
39.4 TUE. La centralización en el nivel comunitario de las políticas en materia de contratación
de trabajadores del mar. A propósito de la STJCE de 30 de septiembre de 2003, Asunto
C-405/01, Colegio de Oficiales de la Marina Mercante Española y Administración del Estado
[2004] 52 Revista del Ministerio de Trabajo y Asuntos Sociales 174–175.
54
See The Commission Communication C(2004)43 on Community guidelines on State aid
to maritime transport (OJ C 13, 17.1.2004), p. 5.
55
Ibid.
56
See ILO, The impact on seafarers’ living and working conditions changes in the structure
of the shipping industry. Report for discussion at the 29th Session of the Joint Maritime
Commission, Geneva 2001, p. 24–30.
346 xosé manuel carril-vázquez

the subject in the social law of the European Union.57 The most practical and
effective means of obtaining this result is, always from a legal point of view,
“social dialogue”—with heavy implication not only on employers and unions
acting in the maritime sector, but also on the institutions of the European
Union—governed in Article 139 of the EC Treaty, according to which: (1)
“should management and labour so desire, the dialogue between them at
Community level may lead to contractual relations, including agreements”;58
(2) “[a]greements concluded at Community level shall be implemented either
in accordance with the procedures and practices specific to management and
labour and the Member States or, in matters covered by Article 137, at the
joint request of the signatory parties, by a Council decision on a proposal
from the Commission”;59 and (3) “the Council shall act by qualified majority,
except where the agreement in question contains one or more provisions relat-
ing to one of the areas for which unanimity is required pursuant to Article
137(2). In that case, it shall act unanimously”.60 The viability of this path has
been proved, in its turn, by the above cited two Directives of the European
Communities concerning the agreement on the organization of the working
time of seafarers concluded by the European Community Shipowners’
Association (ECSA) and the Federation of Transport Workers’ Unions in the
European Union (FST), and the Directive concerning the enforcement of
provisions in respect of seafarers’ hours of work on board ships calling at
Community ports; both of which should be extended to conditions of employ-
ment of sea workers other than working time. Anyway, this should not be any
great news, since many years ago the International Transport Workers
Federation implemented the so-called “blue certificate”,61 consisting in the
concession to shipowners with vessels registered in “parallel flags” a union
credential certifying the achievement of certain minimum labour and social
security conditions.62

57
See Chaumette, P., The evolution of seafarers’ employment law-Deconstruction/
Reconstruction [2005] 1 Revue Hellénique de Droit Maritime 1–21.
58
Article 139.1.
59
Article 139.2, para.1.
60
Article 139.2, para. 2.
61
See Carril Vázquez, X.M., Asociaciones sindicales y empresariales de carácter internacional,
Comares, Granada, 2003, 172.
62
For more information visit http://www.itfglobal.org/flags-convenience/flags-convenien-
924.cfm.
 PART IV

FREEDOM OF CONTRACT VERSUS REGULATION

UNCITRAL DRAFT CONVENTION ON CONTRACTS FOR THE
INTERNATIONAL CARRIAGE OF GOODS WHOLLY OR PARTLY
BY SEA: MANDATORY RULES AND FREEDOM OF CONTRACT*

Regina Asariotis**

I. Introduction
1. What is the Rationale for Mandatory Regulation of Liability in the Field of
Carriage of Goods by Sea?
II. To Which Extent is the Draft UNCITRAL Convention Mandatory?
1. Scope of Application
2. Liability of the Carrier
3. Liability of the Shipper
4. Mandatory Nature of Liability
III. Volume Contracts: What is Being Proposed?
1. What is a Volume Contract?
2. Special Rules for Volume Contracts: Under Which Conditions are Contractual
Derogations Permitted?
3. Limits on the Right to Derogate
4. When are Third Parties Bound?
5. Mandatory Rules and Freedom of Contract under the Draft Convention: What
is the Upshot?
IV. Potential Implications of the Proposed Special Rules on Volume Contracts
1. Volume Contracts between Parties of Equal Bargaining Power
2. Volume Contracts between Parties of Unequal Bargaining Power: Potential for
Abuse?
V. Final Remarks

I. Introduction

After years of deliberation, work on the text of a Draft Convention on

Contracts for the International Carriage of Goods Wholly or Partly by Sea has
recently been completed by an UNCITRAL Working Group, which had been
working on a draft legal instrument since 2002.1 A final draft text was adopted,

* Please note that the text of the UNCITRAL Draft Convention as discussed here was
adopted unchanged by the UN General Assembly on 11 December 2008. All relevant refer-
ences to the Draft Convention should therefore now be read as relating to the UNCITRAL
Convention, as adopted, which will be known as the “Rotterdam Rules”.
** Senior Legal Officer, UNCTAD, Geneva. The views represented in this article are those
of the author and do not necessarily reflect those of the UNCTAD secretariat.
1
For the consolidated text prepared by the Working Group see Annex to document
A/CN.9/645, available at www.uncitral.org under Working Group III. All other related working
350 regina asariotis

on 3 July 2008, by the UNCITRAL Commission and has been submitted to

the UN General Assembly (GA) for adoption later this year (hereafter “Draft
Convention”).2 Subject to approval by the GA, a signing conference is to
be held in 2009 in Rotterdam; thereafter the Convention will be open for
adoption by individual States.
The Draft Convention is to provide a modern successor to the Hague-Visby
Rules3 and Hamburg Rules,4 the two main international liability regimes
governing carriage of goods by sea, but, if and when it enters into force, will
also govern contracts for multimodal transportation which involve an interna-
tional sea-leg.5 The Draft Convention consists of 96 articles which are con-
tained in 18 chapters. To a large extent, the Draft Convention covers matters
which are dealt with in existing liability regimes, namely the Hague-Visby
Rules and the Hamburg Rules, albeit with significant changes in terms of struc-
ture, wording and substance. In addition, several chapters are devoted to
matters currently not subject to international uniform law, such as delivery of
the goods 6 and the transfer of the right of control and of rights of suit.7 The
Draft Convention also provides for electronic communication and the issue
of electronic substitutes to traditional paper documents, largely by recognizing

documents can also be found on the website. For an article-by-article commentary by the
UNCTAD secretariat on an early version of the text, as well as a note on aspects of carrier
liability and freedom of contract, see UNCTAD/SDTE/TLB/4 and UNCTAD/SDTE/
TLB/2004/2, available at www.unctad.org/ttl/legal.
2
The final draft text as adopted by the UNCITRAL Commission is contained in Annex I
to the report of the meeting, document A/63/17 (available at www.uncitral.org under
Commission documentation).
3
International Convention for the Unification of Certain Rules of Law Relating to Bills of
Lading, 1924 (Hague Rules), as amended by the Visby and SDR protocols 1968 and 1979
(Hague-Visby Rules).
4
United Nations Conventions on Contracts for the Carriage of Goods by Sea, 1978.
5
The substantive scope of application remained controversial, even at the UNCITRAL Com-
mission meeting at which the final text was agreed, with some States proposing to make the mul-
timodal application of the new international regime optional. For analysis of relevant provisions in
earlier versions of the Draft Conventions, see Alcantara, J.M., The new regime and multimodal
transport [2002] LMCLQ 399; Czerwenka, B., Scope of Application and Rules on Multimodal
Transport Contracts; Clarke, M., A conflict of conventions: The UNCITRAL/CMI draft transport
instrument on your doorstep [2003] JIML 28; Haak, K.F. and Hoeks, M., Arrangements of inter-
modal transport in the field of conflicting conventions, JIML [2004] 422; Faghfouri, M.,
International Regulation of Liability for Multimodal Transport - In Search of Uniformity [2006]
WMU Journal of Maritime Affairs 61, and Hoeks, M., Multimodal carriage with a pinch of sea salt:
door-to-door under the UNCITRAL Draft instrument [2008] ETL 257.
6
For some relevant analysis of provisions, see Asariotis, R., Main Obligations and Liabilities
of the Shipper, Transportrecht [2004] 284; Asariotis, R., What future for the bill of lading as a
document of title? [2008] JIML 75 and Diamond, A., The next sea carriage Convention? [2008]
LMCLQ 135.
7
See for instance Clarke, M., Transport documents: their transferability as documents of
title; electronic documents, [2002] LMCLQ 356; Schelin, J., Documents [2004] Transportrecht,
for some analysis of earlier drafts of the text.
 uncitral (draft) convention on contracts 351

contractual agreements in this respect and by according electronic records

similar status to paper-based documents.8
While proper consideration of the Draft Convention’s individual provi-
sions or even a summary of its content is not possible here,9 this contribution
concentrates on an important question, namely the degree to which the Draft
Convention permits freedom of contract for some types of contract. Although
in general contracts covered by the Draft Convention are, as in the position
under existing maritime liability regimes, covered by mandatory minimum
standards of liability, this is subject to an important exception. So-called “vol-
ume contracts” which, for the first time, would be regulated in an interna-
tional convention will be subject to special rules providing for extensive
freedom of contract.
This represents an important novel feature, distinguishing the new Draft
Convention from existing conventions in the field and, therefore, is of par-
ticular interest. Apart from the obvious need to understand what exactly is
being proposed, the provisions on volume contracts may, if and when the
Draft Convention enters into force, have important repercussions, both for
commercial contracting practice and, more generally, the prospects for inter-
national legal uniformity in the field of carriage of goods.

1. What is the Rationale for Mandatory Regulation of Liability in the Field

of Carriage of Goods by Sea?
By way of background it appears appropriate briefly to recall the position
under the existing international liability regime, as well as the rationale for
mandatory regulation of liability in a field where commercial parties contract
with one another and, therefore, normally freedom of contract reigns.
All international liability regimes for the carriage of goods by sea currently in
force (i.e. The Hague, Hague-Visby and Hamburg Rules) establish minimum

8
On this aspect, see for instance van der Ziel, G., The legal underpinning of e-commerce in
maritime transport by the UNCITRAL Draft Instrument on the Carriage of Goods by Sea
[2003] JIML 461 and Goldby, M., The performance of the bill of lading’s functions under
UNCITRAL’s draft Convention on the carriage of goods: unequivocal legal recognition of
electronic equivalents [2007] JIML 160.
9
For an article-by-article commentary by the UNCTAD secretariat on an early version of
the Draft Convention, see UNCTAD/SDTE/TLB/4, published in 2002 (available at www
.unctad.org/ttl/legal). Much of the analysis remains relevant, even in respect of the final draft
text of the Convention. See also Diamond, A., The next sea carriage Convention? [2008]
LMCLQ 135. For earlier analysis of different aspects of the draft legal instrument see also the
papers of a colloquium, held in 2002 in Romsey, published in [2002] LMCLQ 304–417 and
papers of an International Symposium held in 2004 in Hamburg, published in [2004]
Transportrecht 274–308.
352 regina asariotis

levels of carrier liability, which apply mandatorily, that is to say the relevant
substantive rules on liability of the carrier may not be contractually modified to
the detriment of the shipper or consignee.10 Contractual increase of the carrier’s
liability is, however, permitted.11 The mandatory scope of application of the
relevant regimes extends to contracts of carriage which are not individually
negotiated between the parties, but are conducted on the carrier’s standard
terms, as typically contained in or evidenced by a bill of lading or other trans-
port document issued by the carrier.
The Hague Rules and Hague-Visby Rules apply mandatorily to “bills of
lading or similar documents of title”12 Non-negotiable sea waybills are not
expressly covered. However, as they are also standard form documents, issued
by a carrier and operating as a receipt and as evidence of a contract of carriage,
the national legislation of some States extends the protection of the Hague
and Hague-Visby Rules to non-negotiable sea waybills.13 The Hamburg Rules
apply to all contracts for the carriage of goods by sea other than charterpar-
ties,14 and thus include contracts covered by negotiable as well as non-negotiable
transport documents.

10
See Arts. III, r.8 of the Hague and Hague-Visby Rules and Art. 23 of the Hamburg Rules.
It should be noted that under English law, even attempts at indirectly reducing the carrier’s
liability under the Hague-Visby Rules, such as through contractual choice of a jurisdiction
where the Hague-Visby Rules would not be applied to a contract falling within its mandatory
scope, are inadmissible, see the House of Lords decision in The Hollandia, sub. nom The
Morviken [1983] 1 A.C. 565. Under the Hamburg Rules, any contractual stipulation which
“derogates, directly or indirectly, from the provisions of [the] Convention” is null and void
under Art. 23(1) and any transport document issued must expressly incorporate the Hamburg
Rules (Art. 23(3) ). Art. 23(4) Hamburg Rules further provides for a right to damages if a cargo
claimant has incurred a loss as a result of a contractual derogation or failure to incorporate the
Hamburg Rules into any transport document issued. This again would cover instances where
the minimum liability of a carrier as provided for by the Hamburg Rules would be reduced
as a result of a contractual choice of forum clause. On the mandatory application of the
Hamburg Rules see further Asariotis, R.: Anwendungssystem und Zuständigkeitsvorschriften
der Hamburger Regeln als Mittel zur Durchsetzung des Haftungssystems [1998] ETL 161.
11
Art. V Hague-Visby Rules and Art. 23(2) Hamburg Rules.
12
See the definition of “contract of carriage” in Art. I(b)of the Hague and Hague-Visby
Rules. Note that in English law a “straight” bill of lading, i.e. a non-negotiable bill of lading
made out to a named consignee, is now also recognized as a document of title, albeit a non-
transferable one, see J.I. Macwilliam Co. Inc. v. Mediterranean Shipping Co. S.A., The Rafaela S
[2002] EWCA Civ 556; [2003] 2 Lloyd’s Rep. 113, a Court of Appeal decision later affirmed
by the House of Lords at [2005] UKHL 11, [2005] 2 AC 423, [2005] 1 Lloyd’s Rep 347. The
position is similar in some jurisdictions, but different in others, notably the United States.
Charterparties are also expressly excluded from the scope of application of the Hague and
Hague-Visby Rules, see Art. V.
13
For an overview of relevant legislation in different jurisdictions see Tetley, W., International
Maritime and Admiralty Law, Cowansville, 2002, fn. 76 at p. 80.
14
Arts. 1(6), 2(1) and (3) Hamburg Rules.
 uncitral (draft) convention on contracts 353

The main purpose of this approach, common to all established international

liability regimes, is to reduce the potential for abuse in the context of contracts
of adhesion, used where parties with unequal bargaining power contract with
one another. In liner carriage, where few large liner companies dominate
the global market15 and goods are typically shipped under bills of lading or
other standard form documents – issued and signed by the carrier and usually
drafted in terms favourable to the carrier, with no scope for negotiation – the
potential for abuse arising from the unequal bargaining power of the parties
is particularly obvious. By establishing minimum levels of carrier liability
which apply mandatorily and may not be contractually modified, existing
liability regimes seek to ensure the protection of cargo interests with little
bargaining power, i.e. small shippers and third party consignees, against unfair
contract terms unilaterally introduced by the carrier in its standard terms of
contract.16
Thus, a central feature of the established international legal framework is a
restriction of freedom of contract with the legislative intent to ensure the pro-
tection of small parties against unfair standard contract terms.
Against this background, it is worth considering the extent to which the
new Draft Convention on the one hand applies mandatorily and, on the other
hand, permits freedom of contract in respect of volume contracts.

II. To Which Extent is the Draft UNCITRAL

Convention Mandatory?

Proper consideration of this question would require a full examination of the

Draft Convention’s substantive liability provisions, as well as of a number of
incidental questions, such as the question of how much scope there is for
contracting out. This is clearly not possible within the scope of this contribu-
tion. However, in summary, central features of the liability regime which are
worth highlighting include the following:

15
The top ten liner companies control more than 50% of global container-carrying capacity
and the top twenty-five companies control around 80%. See DynaLiners Carrier, Port and
Terminal Operator Rankings as of 31 December 2007, 19 May 2008 (www.dynamar.com),
indicating shares of 51% and 83% respectively. See also www.ci-online.co.uk where the respec-
tive shares are 51% and 73%.
16
Where bills of lading are negotiable, i.e. are intended for sale of the goods in transit, the
need for protection of a third-party consignee becomes especially urgent: in international trade
on shipment terms, risk usually passes on shipment and the final endorsee in possibly a long
chain of different buyers will have to sue the carrier in case of loss of or damage to the goods on
the terms of the bill of lading. For an overview of the different types of transport documents
and their use, see UNCTAD, The Use of Transport Documents in International Trade,
UNCTAD/SDTE/TLB/2003/2.
354 regina asariotis

1. Scope of Application17
The Draft Convention applies to contracts of carriage18 in which the places of
receipt and delivery are in different States, provided the contract involves an
international sea-leg and the contractual place of receipt, loading, discharge or
delivery is located in a Contracting State (Art. 5). The Draft Convention does
not apply to charterparties or to “other contracts for the use of a ship or for any
space thereon” and does not apply to contracts of carriage in non-liner trans-
portation, except where “there is no charterparty or other contract for the use
of a ship or of any space thereon and a transport document or an electronic
transport record is issued” (Art. 6). However, in these cases, the Draft Convention
would apply as between the carrier and consignee, controlling party or holder
which is not an original party to a contract excluded under Art. 6 (Art. 7).

2. Liability of the Carrier19

The carrier (as well as any maritime performing party)20 is subject to a number
of obligations breach of which gives rise to liability which is subject to a mon-
etary cap.21 The main obligations include the duty to carry the cargo and deliver
the goods to the consignee (Art. 11), a duty of care, similar to that in Art. III,
r. 2 of the Hague-Visby Rules, but during the carrier’s period of responsibility,
i.e. from receipt to delivery of the goods (Arts. 13(1) and 12), and a duty to

17
On scope of application see, for instance Rosaeg, E., The applicability of Conventions for
the carriage of goods and for multimodal transport [2002] LMCLQ 316; Sturley, M.F., Scope
of coverage under the UNCITRAL Draft instrument [2004] JIML 138; Sturley, M.F., Solving
the Scope-of-Application Puzzle: Contracts, Trades and Documents in the UNCITRAL
Transport Law Project [2005] JIML 22.
18
Contract of carriage is defined, in Art. 1(1), as a “contract in which the carrier, against the
payment of freight, undertakes to carry goods from one place to another. The contract shall
provide for carriage of goods by sea and may provide for carriage by other modes of transport
in addition to sea carriage”.
19
On carrier liability see, for instance Berlingieri, F., Basis of liability and exclusions from
liability [2002] LMCLQ 336; Honka, H., Main Obligations and Liabilities of the Carrier,
Transportrecht (2004) 278; Delebecque, P., The liability of the sea carrier in the UNCITRAL
Draft Convention on contracts for the international carriage of goods wholly or partly by sea,
see this volume, infra, 366.
20
Defined in Art. 1 (7) and (6). Accordingly, a maritime performing party is a party which
performs or undertakes to perform any of the carrier’s obligations, at the carrier’s request or
under its supervision, during the period between arrival of the goods at the port of loading and
their departure from the port of discharge. An inland carrier is a maritime performing party
only if it performs/undertakes to perform its services exclusively within a port area. The defini-
tion would seem to include terminal operators.
21
See Art. 59, according to which “the carrier’s liability for breaches of its obligations under
this Convention is limited to 875 [SDR] per package or other shipping unit or 3 [SDR] per kg
of the gross weight of the goods that are subject to the claim or dispute, whichever amount is
higher”, except where a higher value of the goods had been declared or a higher limit of liability
has been agreed.
 uncitral (draft) convention on contracts 355

exercise due diligence to “make and keep” the vessel seaworthy (Art. 14); this
includes (a) physical seaworthiness of the vessel, as well as (b) manning, supply
and equipment, and (c) cargoworthiness of the vessel. In contrast to the Hague-
Visby Rules, the seaworthiness obligation is a continuous one, applying
throughout the carriage, and there is no general reversal of the burden of proof
regarding the exercise of due diligence (cf. Art. IV, r. 1 HVR). Instead, the
central provision dealing with liability of the carrier for loss, damage or delay
in the context of a cargo claim, Art. 17, which sets out a list of exceptions to
liability, including some which differ from the list in Art. IV, r. 2 of the Hague-
Visby Rules,22 also contains detailed and complex rules on burden of proof.
Worth noting in this respect are a number of points which are of particular
relevance in the context of contracts conducted on the carrier’s standard terms,
i.e. contracts of adhesion. First, the carrier’s period of responsibility (receipt
to delivery) may be contractually defined (i.e. restricted), to cover only the
period from initial loading to final unloading under the contract (Art.12(3) ).
Secondly, the carrier’s responsibility for certain functions, such as loading, han-
dling, stowing, and unloading, may be contractually transferred to the shipper/
consignee/documentary shipper23 (Art.13(2) ). Thirdly, the carrier’s liability for
special cargo and for live animals may be contractually limited or excluded (Art.
81). Therefore, a carrier (or maritime performing party) may be liable only from
loading to discharge and for only some of a carrier’s functions set out in the
Draft Conventions. Moreover, as has been explained elsewhere,24 the rules on
burden of proof within the scheme of the Draft Convention appear to differ
significantly from those in the established maritime liability conventions, favour-
ing the carrier, in particular in cases where the unseaworthiness of the vessel may
have contributed to a loss arising from the carriage of dangerous cargo.

3. Liability of the Shipper 25

The shipper’s obligations and liability are more extensive than in the Hague-
Visby Rules and are set out in some detail in chapter 7 of the Draft Convention.

22
See in particular Arts 15, 16 and 17 (3) (o) of the Draft Convention.
23
A “documentary shipper” is defined in Art. 1(9) as “a person, other than the [contracting]
shipper, that accepts to be named as “shipper” in the transport document or electronic trans-
port record”.
24
See Asariotis, R. [2008] 6 JIML, in press, as well as Asariotis, R., Allocation of Liability and
Burden of Proof in the Draft Instrument on Transport Law [2002] LMCLQ 382 analyzing an
earlier draft version of the text. See also UNCTAD, Carrier liability and freedom of contract
under the UNCITRAL draft instrument on the carriage of goods [wholly or partly][by sea],
UNCTAD/SDTE/TLB/2004/2.
25
For detailed analysis of the relevant provisions, as contained in an earlier text of the Draft
Convention, see Asariotis, R., Main Obligations and Liabilities of the Shipper [2004]
Transportrecht 284. See also Zunarelli, S., The liability of the shipper [2002] LMCLQ 350.
356 regina asariotis

They include fault-based liability relating to the preparation and delivery for
carriage of the goods (Art. 27) and in respect of wide-ranging information and
documentation requirements (Art. 29), which may become particularly rele-
vant in the context of new maritime security requirements. They also include
strict liability (cf. Art. 30(2) ) for loss arising from the shipment of dangerous
cargo (Art. 32) and the failure to provide timely and accurate contract particu-
lars (Art. 31 (2) ). A final consignee who makes a claim under the contract
may also become liable for breach of any of the shipper’s obligations.26
Moreover, a so-called “documentary shipper”, i.e. a party who is not the con-
tracting shipper but who “accepts to be named as “shipper” in the transport
document” (Art. 1(9) ), such as an f.o.b. seller, is also liable for any breach of
a shipper’s obligations, in addition to the shipper himself (Art. 33). It is worth
highlighting that the shipper’s liability, in contrast to the carrier’s liability
under the Draft Convention, is not subject to any monetary limitation.

4. Mandatory Nature of Liability

Art. 79 sets out the general rule on mandatory application of the liability
regime. Accordingly, unless otherwise provided in the Draft Convention, a con-
tractual term is void (a) if it excludes or limits the obligations or liability of the
carrier or maritime performing party and (b) if it excludes, limits or increases
the obligations or liability of shipper, consignee, controlling party, holder or
documentary shipper (e.g. f.o.b. seller). Thus, in contrast to the Hague-Visby
Rules, it is not only the carrier who is subject to mandatory minimum liability
standards under the Draft Convention, but also the shipper (and anyone liable
for breach of the shipper’s obligations, such as the consignee and documentary
shipper). While the carrier’s liability, which is subject to a financial cap,
may be increased contractually, the shipper’s liability may not. However, it
should again be noted that the shipper’s mandatory liability under the Draft
Convention is not subject to any monetary limitation.

III. Volume Contracts: What is Being Proposed?27

Volume contracts are not altogether excluded from the application of the Draft
Convention, but are, with limited exceptions, exempt from its mandatory

26
This includes the shipper’s guarantee as to the accuracy of contract particulars, set out in
Art. 31. In contrast, under the Hague-Visby Rules, Art. III, r.5, the equivalent obligation and
indemnity is personal to the shipper and does not attach to a third party, i.e. does not affect a
consignee’s rights or creates any obligation for the consignee.
27
On this issue, at an earlier stage of the negotiation process, see also Berlingieri, F., Freedom
of contract under the Rules; Forum and Arbitration Clauses [2004] Transportrecht 303. For an
 uncitral (draft) convention on contracts 357

application. Therefore, while the Draft Convention applies by default to

volume contracts, contracting parties may exclude its application altogether
or adopt a “cherry picking” approach, whereby only certain provisions are
substituted or amended by different contractual terms. The main rationale for
the special treatment of certain types of contracts is that where ‘sophisticated
parties’ with potentially equal bargaining power contract with one another,
there is no need for statutory restriction of freedom of contract to protect a
weaker party against unfair contract terms.28
Against this background, the definition of a volume contract and the con-
ditions under which contractual derogation is permitted are of particular
relevance.

1. What is a Volume Contract?

A volume contract is defined as “a contract of carriage that provides for the
carriage of a specified quantity of goods in a series of shipments during an
agreed period of time. The specification of quantity may include a minimum,
a maximum or a certain range” (Art. 1(2) ).
As is evident, the definition is extremely wide, as no minimum cargo quan-
tity needs to be specified. As a result, even a contract for the carriage of as little
as two or three containers could be covered by the definition. This being the
case, the content of the substantive provisions setting out the special rules for
volume contracts is of particular importance.

2. Special Rules for Volume Contracts: Under Which Conditions are Contractual
Derogations Permitted?
Art. 80 is the central provision setting out the special rules for volume con-
tracts and, for ease of reference, is reproduced in the Annex to this contribu-
tion. As between carrier and shipper, notwithstanding Art. 79, “a volume

overview of the genesis of the set of provisions dealing with volume contracts and the relevant
debate within the UNCITRAL Working Group, see the final report of the working group,
A/CN.9/645 at paras. 235–253. Relevant proposals submitted by delegations in the course of
the UNCITRAL Working Group deliberations concerning volume contracts are contained
in documents A/CN.9/WG.III/WP.34 and 42 (United States), as well as in document
A/CN.9/WG.III/WP.88 (Australia and France). Relevant submissions by Governments to the
UNCITRAL Commission at which the text was finalized are available on the UNCITRAL
website (under Commission documents for the 41st session). It should be noted that a number
of delegations, including those of Australia, New Zealand and China, had expressed particular
concerns in relation to the treatment of volume contracts. These, however, did not lead to a
change in the final text as adopted by the Commission.
28
See, for instance, the Report of the Working Group on the work of its final session in
January 2008, A/CN.9/645, at para. 36, where it stated: “It was considered that such contracts
358 regina asariotis

contract to which this Convention applies may provide for greater or lesser
rights, obligations and liabilities than those imposed by this Convention”
(Art. 80(1) ).
Contractual derogations are binding only under certain conditions and the
party claiming the benefit of the derogation bears the burden of proof that
these have been fulfilled (Art. 80(6) ). The specified conditions may be sum-
marized as follows:
– The volume contract must contain a prominent statement that it derogates
from the Draft Convention (Art. 80(2)(a) ) and must be individually nego-
tiated or prominently specify the sections of the volume contract contain-
ing the derogations (Art. 80(2)(b) ).
– The shipper must be given the opportunity and notice of the opportunity
to contract without derogation (Art. 80(2)(c) ).
– The derogation may not be incorporated by reference from another docu-
ment or be “included in a contract of adhesion that is not subject to nego-
tiation” (Art. 80(2)(d) );
– “A carrier’s public schedule of prices and services, transport document, elec-
tronic transport record or similar document” is not a volume contract, but
a volume contract “may incorporate such documents by reference as terms
of the contract” (Art. 80(3) );
Thus, as between carrier and shipper, derogations from the Draft Convention
set out in a volume contract are binding, even if the contract has not been
individually negotiated. Incorporation of terms by reference is permitted, but
any derogations must be set out in the volume contract itself. The shipper
must be given the opportunity to contract without derogation. In practice,
however, it may well be possible for a small shipper who opted to contract
without derogation from the Draft Convention to find itself compelled to
accept a significantly higher freight rate.

3. Limits on the Right to Derogate

No contractual derogations are permitted regarding certain specified rights,
obligations or liability under the Draft Convention (Art. 80(4) ). These include

would include those that, in practice, were the subject of extensive negotiation between ship-
pers and carriers, as opposed to transport contracts that did not require (or where commercial
practices did not allow for) the same level of variation to meet individual situations. The latter
generally took the form of contracts of adhesion, in the context of which parties might need the
protection of mandatory law”.
 uncitral (draft) convention on contracts 359

on the carrier side (i) the loss of the right to financial limitation of liability in
case of recklessness or intention (Art. 61) and (ii) the obligation, under Art.
14(a) and (b) to make and keep the ship seaworthy and to “properly crew,
equip and supply the ship”. Not mentioned in this context is the third aspect
of the carrier’s seaworthiness obligation, i.e. the obligation to make and keep
the vessel cargoworthy (cf. Art. 14(c) ); therefore, contractual derogation in
this respect would, quite surprisingly, be permitted.
So far as the shipper’s obligations and liabilities are concerned, no deroga-
tions are permitted regarding (i) the duty to provide documentation, instruc-
tions and information under Art. 29 and (ii) the obligations and (strict)
liability arising in the context of dangerous goods, under Art. 32. Therefore,
the potentially extensive liability of the shipper arising from any breach of
these obligations, which may include loss of a vessel or delay of a vessel and is
not subject to monetary limitation, may not be contractually excluded, limited
or modified.

4. When are Third Parties Bound?

Contractual derogations agreed between the original parties to a volume con-
tract are binding vis-à-vis a third party, such as a final consignee or a “docu-
mentary shipper”, if that person
– “received information that prominently states that the volume contract
derogates from this Convention” and
– “gave its express consent to be bound by such derogations” and
– “such consent is not solely set forth” in a carrier’s tariff or in the transport
document or electronic transport record (Art. 80(5) ).
Thus, third parties are bound by derogations included in a volume contract
provided they have given their express consent. However, it is not clear whether
the carrier would be entitled to attach any additional conditions, which would
make refusal of the relevant consent commercially unattractive. Also, it should
be noted that in cases where the volume contract contains a valid arbitration
clause, a third party may be bound by the arbitration clause, even without any
express consent. In these cases, it would seem that a third party would have
to accept the resolution of any dispute by arbitration, although presumably
on terms of the Draft Convention, rather than on any differing terms in the
volume contract.29

29
On the question of regulating choice of forum in the draft legal instrument see Herber, R.,
Jurisdiction and arbitration – should the new Convention contain rules on these subjects?
360 regina asariotis

5. Mandatory Rules and Freedom of Contract under the Draft Convention:

What is the Upshot?
As is apparent, the Draft Convention introduces two major changes to the
international regulation of liability as established in existing maritime liability
regimes since 1924, when the Hague Rules were adopted. First, it is not only
the carrier who is subject to mandatory standards of liability, but also the ship-
per and, potentially, a third party consignee or documentary shipper (e.g.
f.o.b. seller). Secondly, in respect of volume contracts, which are defined very
broadly, the Draft Convention provides for freedom of contract, with very
limited exceptions and subject to some conditions.

IV. Potential Implications of the Proposed Special Rules on

Volume Contracts30
1. Volume Contracts between Parties of Equal Bargaining Power
Clearly, in relation to contracts of carriage concluded between parties of
broadly equal bargaining power, the approach adopted with respect to volume
contracts does not give rise to particular concerns. Large shippers are just as
able effectively to safeguard their interests in contractual negotiations, as are
large carriers. Often, the big shippers are themselves carriers, namely freight
forwarders, who do not operate any vessels, but have contracted with smaller
shippers to transport the cargo from door to door. Freight forwarders may
thus be both carrier (vis-à-vis the smaller shipper) and shipper (vis-à-vis a
unimodal carrier, such as a sea-carrier).

[2002] LMCLQ 405 and Berlingieri, F., Freedom of contract under the Rules; Forum and
Arbitration Clauses [2004] Transportrecht 303. In general, the Draft Convention rules on
jurisdiction and arbitration which are set out in chapters 14 and 15 only apply if a Contracting
States declares that it will be bound by them (see Arts. 74 and 78). Absent such declaration,
national rules would apply to determine whether contractual choice of a forum is admissible.
Under the Draft Convention, contractual choice of forum is in general permitted in the context
of volume contracts, but the position of third parties is specially regulated. Whether third par-
ties are bound by such contractual choice of forum depends on the “law of the court seized” (in
case of jurisdiction clauses) or the “applicable law” (in case of arbitration clauses) and on
whether the selected forum is situated in one of a number of listed places. It is interesting to
note that a third party would not need to agree expressly to be bound by the choice of forum
in a volume contract (cf. Arts. 67(2) and 75(4) ). There is considerable uncertainty associated
with the practical application of these provisions in different jurisdictions, which may or may
not have opted into the jurisdiction and arbitration chapters. However, it seems that if and
when the Draft Convention provisions apply, a third party which does not give its express
consent to be bound by the terms of a volume contract may still find itself bound by a jurisdic-
tion or arbitration clause contained in the volume contract.
30
This part draws on considerations first raised in UNCTAD/SDTE/TLB/2004/2, fn.1
above.
 uncitral (draft) convention on contracts 361

Nevertheless, it should be noted that as the Draft Convention applies by

default, albeit not mandatorily, a contracting party with more detailed knowl-
edge of all the terms of the complete set of rules may find itself at an advantage.
This in particular as the parties may selectively exclude or modify individual
provisions, rather than opt for or against the application of the entire set of
rules. Unless both contracting parties pay due attention to all of the potentially
applicable provisions of the Draft Convention, as modified, excluded or sup-
plemented contractually, one or other of the contracting parties may find itself
“by default” to have agreed to potentially disadvantageous terms. More gener-
ally, the potential benefits associated with a predictable internationally uniform
liability regime may, in the longer run, fail to materialize if, in future practice,
modification of the provisions in the Draft Convention by commercial parties
and their teams of lawyers becomes the norm.
Moreover, from a shipper’s perspective, it is important to note that its liabil-
ity arising from breach of Arts. 29 and 32 - which may be extensive, such as
in the case of loss of or delay of a vessel, and is not subject to monetary limita-
tion - may not be contractually excluded, limited or modified. This means
that a shipper would always be exposed to potentially extensive liability under
the Draft Convention for losses arising from the carriage of dangerous cargo
or breach of the obligation to provide certain documentation, information
and instruction.31
Although an effort has been made by the draftsmen to ensure that third
parties are bound by volume contracts only if they expressly consent to be
bound, it is questionable whether this will ensure protection of small third
party consignees who, in practice, may find that their only commercially via-
ble choice is to give their consent.

2. Volume Contracts between Parties of Unequal Bargaining Power:

Potential for Abuse?
While there is no need to protect parties with equal bargaining power by way
of mandatory legislation, the situation is markedly different if parties with
clearly unequal bargaining power contract with one another. It is in this
context that concerns arise about the potential use of volume contracts as
devices to circumvent otherwise applicable mandatory liability rules. Experience

31
It should again be noted that information duties under Art. 29 and any potential liability
for failure to comply may, in future, become more relevant as a result of international and
national regulation to enhance maritime and supply-chain security (see above, at II.3). Potential
losses could arise, for instance, as a result of a delay of a vessel, due to a failure on the part of
the shipper to provide required documentation or information.
362 regina asariotis

with so-called “service contracts”32 under which in some trades reportedly

more than 80% of cargo is carried33 and on which volume contracts under the
Draft Convention are, to an extent, modelled,34 suggests that these types of
contracts may be used not only as between large shippers and carriers, but also
for the carriage of very small quantities, such as 10 or 20 TEUs or even 1
TEU.35 It is clear that in this context the contracting parties are not usually of
equal bargaining power. A contract concluded between the shipper of a small
number of containers and one of the world’s top 25 liner companies – in con-
trol of around 75–80% of global TEU carrying capacity36 – is not likely to be
conducted on the basis of individually negotiated terms. Rather, the carrier’s
standard terms of contract, as also contained in or referred to in transport
documents, such as a bill of lading or sea waybill, will be incorporated into the
volume contract. Current practice of course only serves to indicate certain
trends, and no direct parallels may be drawn between volume contracts under
the Draft Convention and service contracts under existing national legisla-
tion.37 Future developments at the global level are likely to depend on the
degree to which the Draft Convention does or does not safeguard against
abuse of “freedom of contract” by parties with stronger bargaining power.
In the Draft Convention, volume contracts are exempt from the manda-
tory scope of application of the liability regime, based on the proposition that
these types of contract are concluded between parties of potentially equal
bargaining power. However, as noted above, the definition of volume contract
is extremely wide and no minimum quantity of cargo is prescribed. As a result,

32
For a definition of the term in U.S. law, see 46 C.F.R. § 530.3 (q). The Shipping Act of
1984 (“1984 Act” or “Shipping Act”), 46 U.S.C. app. § 1701 et seq., was amended by the
Ocean Shipping Reform Act of 1998, Pub. L. 105–258, effective May 1, 1999.
33
According to a study published by the U.S. Federal Maritime Commission in 2001 (The
impact of the Ocean Shipping Reporm Act of 1998, “OSRA 1998 Impact Study”, available at www.
fmc.gov), “OSRA 1998 has dramatically altered the way business is done in the ocean liner
industry”. According to the study (at p. 18), the use of service contracts increased by 200% and,
in some trades, the volume of service contract cargo jumped from 50–60% to 80% and more.
34
See the US proposal in A/CN.9/WG.III/WP.34, paras. 18–29, where the special treat-
ment of “Ocean Liner Service Agreements”, described as “certain specialized and customized
agreements used for ocean liner services that are negotiated between shippers and carriers” was
first proposed.
35
See the F.M.C. OSRA 1998 Impact Study, op. cit., at p. 18–19 and 84–85 according to
which 60% of 1000 service contracts sampled were for 100 TEUs or less, with cargo quantities
ranging from as low as 1 TEU. Less than 10% of contracts sampled contained any provisions
on contractual terms such as carrier liability.
36
See fn. 15, supra.
37
There are obvious differences regarding the definition and specific regulation of service
contracts under U.S. legislation and volume contracts under the Draft Convention. In particu-
lar, it should also be noted that in the United States, the ocean transport industry is subject to
oversight by the Federal Maritime Commission, with primary statutory guidance provided in
the Shipping Act of 1984.
 uncitral (draft) convention on contracts 363

almost any type of contract in the liner trade may be devised as a “volume
contract”, subject to almost complete freedom of contract, with terms set
unilaterally by the party with the stronger bargaining position, i.e., often the
carrier, who may be one of a small number of global liner-carriage operators.
The central question here is whether there are statutory safeguards to effec-
tively protect small parties against the use of volume contracts as contractual
devices to circumvent the mandatory liability regime.
Regrettably, the safeguards which are included in Art. 80 for the protection
of small parties do not appear suitable to prevent any abuse. As between car-
rier and shipper, derogations from the Draft Convention set out in a volume
contract are binding, even if the contract has not been individually negoti-
ated. While derogations must be set out in the volume contract, incorporation
of (standard) terms by reference is permitted. Although the shipper must be
given the opportunity to contract without derogation, a shipper may find
itself under commercial pressure, such as a much higher freight rate that would
apply unless consent was given. Clearly, the legal departments of the large
liner companies will put their creative talent to work to ensure that the carrier
will benefit as much as possible from freedom of contract and, most likely,
from contractual terms which are favourable to the carrier’s interest. As it is,
the provisions regarding volume contracts as set out in the Draft Convention
do not ensure that notional agreement of a volume contract may not be used
as a contractual device to circumvent otherwise applicable mandatory liability
rules to the detriment of the small shipper.

V. Final Remarks

As was pointed out at the outset, by establishing mandatory minimum levels

of liability, existing liability regimes seek to ensure the protection of cargo
interests with little bargaining power, i.e. small shippers and third party con-
signees, against unfair contract terms unilaterally introduced by the carrier in
its standard terms of contract. There appears to be general agreement that this
approach remains appropriate in relation to so-called contracts of adhesion,
i.e. contracts concluded on the carrier’s standard terms as contained in or
evidenced by a transport document (or electronic equivalent) - otherwise it
would be difficult to justify why any of the liability rules in the Draft
Convention should be mandatory at all. At the same time, it appears that in
relation to the drafting of the substantive content of the liability regime these
considerations are less prevalent than is the case with existing regimes. Rather
than being primarily geared to protecting shippers and third-party consignees,
the Draft Convention, based on the assumption that market conditions have
364 regina asariotis

changed somewhat over the years, appears to aim for a substantive liability
regime to regulate the relationship between shippers and carriers as equal
negotiating partners. Under the Draft Convention, the rules on burden of
proof, for instance, seem to be more advantageous to carriers than those in the
Hague-Visby or Hamburg Rules. Moreover, the obligations and liability of
the shipper, which are much more extensive and detailed than under existing
maritime liability regimes, are mandatory.
However, while the substantive content of the Draft Convention is to a
considerable degree geared towards contracting partners of equal bargaining
power, individually negotiated contracts by such parties in the form of volume
contracts are, in any event, not mandatorily governed by the Draft Convention.
Instead, the Draft Convention provides for almost complete freedom of con-
tract in respect of these contracts. A considerate observer is faced with a
conundrum: if the mandatory application of the Draft Convention is, in any
event, restricted to what may be called contracts of adhesion, it is difficult to
see the justification for adopting a substantive liability regime which is signifi-
cantly less protective of shippers and third party consignees than are existing
maritime liability regimes.
Whether the Draft Convention will gain sufficient support to enter into
force is, at this point in time, a matter for conjecture. Also it remains to be
seen how commercial parties would react to the new regulatory environment,
and what courts and arbitrators in different jurisdictions might make of it.
However, it appears that, by laying the ground for almost complete freedom
of contract in respect of volume contracts, which are defined very broadly, the
Draft Convention provides the conditions for potentially major changes in
commercial contracting practice at a global level.
Larger commercial parties, whether as a result of genuine negotiations or,
in the case of liner carriage involving small shipments, as a result of the carri-
er’s ability to exert some commercial pressure to contract on its own terms,
may in future practice often opt to exclude or modify the provisions of the
Draft Convention, adding or changing individual provisions. In this case,
the Draft Convention, designed to provide internationally uniform rules,
may actually help to bring about a curiously different result, namely less inter-
national uniformity. Shippers of whatever size should take note of the fact that
they may potentially face more extensive liability than under existing interna-
tional legal regimes and that much of this liability may not be contractually
reduced or subjected to a monetary cap, even in the context of a volume
contract. As for smaller shippers and consignees, their position may become
particularly precarious: depending on future developments, they may have to
choose between either the benefit of statutory protection against potentially
unfair contract terms or an acceptable freight rate.
 uncitral (draft) convention on contracts 365

Annex
Art. 0 of the Draft Convention

Article 80. Special Rules for Volume Contracts

1. Notwithstanding article 79, as between the carrier and the shipper, a vol-
ume contract to which this Convention applies may provide for greater or
lesser rights, obligations and liabilities than those imposed by this
Convention.
2. A derogation pursuant to paragraph 1 of this article is binding only when:
(a) The volume contract contains a prominent statement that it derogates
from this Convention;
(b) The volume contract is (i) individually negotiated or (ii) prominently
specifies the sections of the volume contract containing the
derogations;
(c) The shipper is given an opportunity and notice of the opportunity to
conclude a contract of carriage on terms and conditions that comply
with this Convention without any derogation under this article; and
(d) The derogation is neither (i) incorporated by reference from another
document nor (ii) included in a contract of adhesion that is not subject
to negotiation.
3. A carrier’s public schedule of prices and services, transport document,
electronic transport record or similar document is not a volume contract
pursuant to paragraph 1 of this article, but a volume contract may incor-
porate such documents by reference as terms of the contract.
4. Paragraph 1 of this article does not apply to rights and obligations provided
in articles 14, subparagraphs (a) and (b), 29 and 32 or to liability arising
from the breach thereof, nor does it apply to any liability arising from an
act or omission referred to in article 61.
5. The terms of the volume contract that derogate from this Convention,
if the volume contract satisfies the requirements of paragraph 2 of this
article, apply between the carrier and any person other than the shipper
provided that:
(a) Such person received information that prominently states that the
volume contract derogates from this Convention and gave its express
consent to be bound by such derogations; and
(b) Such consent is not solely set forth in a carrier’s public schedule of
prices and services, transport document or electronic transport record.
6. The party claiming the benefit of the derogation bears the burden of proof
that the conditions for derogation have been fulfilled.
 THE LIABILITY OF THE SEA CARRIER IN THE
UNCITRAL CONVENTION ON CONTRACTS
FOR THE INTERNATIONAL CARRIAGE OF
GOODS WHOLLY OR PARTLY BY SEA

Philippe Delebecque*

I. Introduction
II. Complexity of the Substantive Law
1. Basis of Liability
2. Scope of Liability
III. Complexity as Regards the Rules of Procedure
1. Which Parties?
2. What Time for Legal Action?

I. Introduction

The carrier’s liability is an aspect of the UNCITRAL Convention. The

UNCITRAL Convention has as its purpose to constitute the new interna-
tional law of carriage by sea. It contains numerous innovations which relate
to its multimodal character, to the admission of freedom of contract in
volume contracts and to the fact that it attempts to cope with all the issues
arising in a contract of international carriage of goods wholly or partly
by sea: transport documents, obligations of the carrier, obligations and liabil-
ity of the shipper, delivery, rights of control, jurisdiction and arbitration.
For all these issues, the convention offers solutions awaited by profession-
als. However the text does not omit to deal with older and traditional issues,
already dealt with by the conventions: such is the case of the carrier’s
liability.
The precedents are Hague-Visby Rules and the Hamburg Rules. The issue of
the carrier’s liability remains at the heart of the law of carriage of goods by sea.
Damages, losses, delay concern shippers, consignees and potential insurers. It
is certain that difficulties and litigation will recur here.
According to the Hague-Visby Rules, the carrier’s liability is based upon
quite a balanced system, in the sense that the carrier is fully liable in the case
of loss and damage, with the exception of specific circumstances (17 in
number) the evocation of which by the carrier relieves him of his liability.

* Professor, University of Paris-I (Pantheon-Sorbonne).

 liability of the sea carrier in the uncitral convention 367

The notion of fault is not entirely excluded; on the contrary: fault continues
to have an important impact, especially in allowing one to neutralize the event
invoked by the carrier in order to relieve him of his liability.
In the Hamburg Rules, the carrier is liable for loss resulting from loss of or
damage to the goods, as well as from delay in delivery (art. 5). However the
same text adds that the carrier can prove that he, his servants or agents took
all measures which could reasonably be required to avoid the occurrence and
its consequences. Of course we know that the courts, as is the case with air law
(Warsaw Convention) where the rules are equivalent, remain severe: if the
carrier wishes to be relieved of his liability, he must identify the cause of the
damage and establish that this cause is not attributable to him. Proof of due
diligence is not sufficient; moreover, the Hamburg Rules omit a number of
events which are exempt under the Hague-Visby Rules.
The UNCITRAL Convention is a system of liability closer to the Hague-
Visby Rules than to the Hamburg Rules. In the course of different sessions of
the Working Group, the question of approximation of the systems of liability
was immediately raised. The system of the Hague-Visby Rules was imposed
immediately, since a number of people demonstrated that the technique of a
catalogue with exceptions allowed for the preservation of provisions which
were not controversial. Some would have preferred more abstract and simpler
provisions, of a continental inspiration, but this was a minority position. We
must point out that the technique of exceptions is used not just in shipping
law: it can be found in most transport conventions (CMR, CMNI, COTIF-
CIM). For the rest, the Working Group did not wish to limit itself only to the
provisions of the Hague-Visby Rules. Hence the modernization of the cata-
logue of exceptions and the abolition of faults of navigation. Hence also
the redefinition of the obligations of the carrier and a solution in favour of
the continuous character of the obligation of seaworthiness (“seaworthy in the
beginning and during the voyage”). Hence, in total, a system of apparently
traditional liability, which is not though, in reality, an exact reflection of the
Hague-Visby Rules.
The characteristics of the liability of the carrier in the UNCITRAL Convention.
The liability of the carrier has from the start had a whole series of characteristics.
It is legal (and not really contractual), mandatory, limited, not based on fault
and it is a source of numerous difficulties of interpretation and application.
Does the UNCITRAL Convention modify this status? The answer is qualified.
– legal liability? In principle yes, since Article 4 clearly specifies that the liabil-
ity of the carrier is interpreted in the same manner, irrespective of the type
of action in question. Whether the suit is based on liability arising from tort
or from a contract, in both cases, the rules apply and the carrier is in the
same position.
368 philippe delebecque

– mandatory liability? In principle yes, since Article 82 prohibits and continues

to prohibit the clauses by which the carrier would attempt to reduce his
liability; it still remains that Article 83 allows derogations in volume con-
tracts (see infra, no 15).
– limited liability? Yes, the question remains what its limits are. After a great
number of discussions, agreement was reached on the following figures: 3
units of account/Kg and 875 units of account/package. Certain delegations
have considerable reservations about these increases, which nevertheless do
not even correspond to the effects of monetary inflation. Others are very
much in favour. The issue is more political than technical. We are not going
to spend any longer on this issue, noting though that the French delegation
actively participated in the elaboration of the present compromise and openly
expressed its preference for the figures currently adopted. We must in any
case point out that the limitation of liability cannot be invoked in the event
of a personal act or omission done with intent to cause the loss or recklessly
and with knowledge that such loss would probably result (Art. 64(2) ).
– liability not based on fault? The liability of the carrier is presented as a liabil-
ity by operation of law (Bonassies P. and Scapel Ch., Traité du droit mati-
time, LGDJ 2006, no 1062). Whatever one may say, this analysis is still
valid. The UNCITRAL Convention does not make any fundamental
change on this point, since the carrier remains liable from the moment the
cause of loss or damage cannot be explained. Moreover, the text nowhere
mentions fault, presumed liability or exclusion of liability.
A complex liability. Beyond these all-in-all standard aspects, the main char-
acteristic of the new convention is its perplexity. First because the provisions
on liability have a very wide scope, bearing in mind the multimodal dimen-
sion of the convention, and secondly because these provisions are numerous
and not always very comprehensible. This is not a criticism; it is simply the
observation of a state of law and of a state of fact. There are multiple stakes,
numerous operators and diverse interests. In other words, the facts are com-
plex. Their legal translation is necessarily complex too. This complexity can be
noted both in the substantive law and in the procedural rules.

II. Complexity of the Substantive Law

1. Basis of Liability
Article 18 of the Convention arranges a real “tennis game” between the claim-
ant and the defendant, a “tennis game” which contains numerous rallies, even
numerous sets.
 liability of the sea carrier in the uncitral convention 369

a) The claimant must prove that the loss, damage or delay was suffered
between the receipt of the goods and their delivery, that is in the period during
which the carrier is held responsible. The rule is understandable and meets the
requirements of the common law: “actori incumbit probatio”. For all that, the
claimant is not in a difficult situation, since he needs only to prove that the
goods were been handed over to the carrier in good condition and that they
were delivered by the latter in a different condition. Moreover, the claimant
must simply establish that the damage occurred during the voyage; he need
not show the cause of the damage. He only needs to establish the presumption
of the damage.
b) The carrier who has been held liable can, as a second move, rebut this
presumption. It is thus his duty to identify the cause of the damage, then to
prove that this cause is not attributable to him.
The carrier can first prove that the cause of the damage is not attributable
to him because he was not at fault or because neither of the persons for whom
he was held responsible was at fault. It is the repetition of the “catch-all clause”
of the Hague-Visby Rules (art. 4-2 q).
The carrier may equally prove that the cause of the damage is not attribut-
able to him because it is in fact attributable, wholly or partly, to one of the
perils enumerated in the convention. There we find the catalogue of excep-
tions (act of God, perils of the sea, strike …) well known from the Hague-
Visby Rules. The listed events have not been classified in a rational order, as
could have been the case had we considered distinguishing between events
related to the management of the vessel and events not related to such man-
agement. They are just listed one after another. The catalogue has been mod-
ernized a little, in the sense that the fault of navigation is no longer listed
therein, which is real progress, and that fire is an excepted event only if it
started on board the vessel. However, “strike” or even “latent defects not dis-
coverable by due diligence” still remain.
c) The claimant can, as a third move, if one dares say so, throw the ball
back to the carrier by proving that it was the carrier’s fault which, wholly or
partly, caused the event or circumstance on which he relies in order to be
relieved of blame.
He can also do the same by proving that an event other than one of those
enumerated in the catalogue of exceptions contributed to the damage.
Nevertheless, the carrier can neutralize this counter-offensive by proving that
such event is not attributable to his fault.
The claimant can also reverse the roles by proving that failure of the carrier
to comply with his obligations as regards seaworthiness (of the vessel or its
equipment, this obligation being from now on continuous, art. 14-a) wholly
or partly caused or, simply, probably caused the damage. But the carrier can
370 philippe delebecque

once again neutralize this counter-offensive by proving that he perfectly

executed his obligations as regards the seaworthiness of the vessel.
d) Finally, if the game is prolonged, it will be necessary to proceed to the
allocation of liability according to the different causes involved. We could
have imagined a system which takes into account the respective gravity of
faults or even distinguishes between situations of the accumulation of a fault
of the carrier and of an excepted event attributable to the diligence of the ship-
per (latent defect of the goods, insufficiency of packing …) and situations
where the excepted event taken into account is not attributable to such dili-
gence (act of the government, perils of the sea …), with the express provision
that in the first case the allocation of liability is conceivable, whereas in the
second case the liability of the carrier at fault should remain intact. This is not
the position adopted, since article 18-6 sets ou the prerequisite of causal link.
The text provides that when the carrier is partly liable, “he is liable only for
that part of the loss, damage or delay that is attributable to the event or cir-
cumstance for which he is liable”. This gives judges a considerable power of
interpretation, causality being a mysterious and often insoluble issue.
Probationary system. This system of liability, which is based upon a series of
presumptions and of rebuttals of presumptions, leaves substantial room for
the rules of evidence. Whoever has the burden of proof shall also assume the
risk. We can claim that this system is largely probationary and rests upon a
continuous exchange of presumptions. Even so, the liability remains legally
binding, in the sense that the carrier is liable each time the cause of damage
remains unknown. This liability thus remains heavy, and even heavier since it
covers a great number of types of damage.

2. Scope of Liability
Damages under the convention. There are a lot of sources of liability for the car-
rier. In addition to loss and damage there is also delay, and other damage more
difficult to identify.
a) Loss or damage. The carrier is, as in the Hague-Visby Rules, liable for loss
and damage which occurred during the voyage. The traditionally admitted
solutions remain applicable. We should note though that the rules of liability
provided for by the convention also apply in the case of damage suffered to
goods carried on deck (deck cargo), such carriage and particularly carriage in
containers being from now on within the scope of the convention (Art. 26).
In addition, compensation payable by the carrier for loss of or damage to
the goods is calculated by reference to the value of such goods at the place and
time of delivery (Art. 23), which also coincides with the rules currently in
force (Hague-Visby Rules, art. 4-5 b).
 liability of the sea carrier in the uncitral convention 371

b) Delay. The liability of the carrier for delay is more difficult to interpret.
The text (Art. 22) indicates that “delay in delivery occurs when the goods are
not delivered at the place of destination provided for in the contract of car-
riage within the time agreed”. The provision, which is the result of a tough
compromise (the liability of the shipper for delay having been abandoned),
implies that the carrier is not held liable if there is no time agreed for the
delivery, which is, in practice, most often the case. The real issue here is the
liability of the carrier in case of delay stricto sensu, resulting from an express
or implicit commitment to deliver before a certain deadline; such liability
is incurred under the terms of Article 18, which is subject to a specific limita-
tion equal to two and one half times the freight (art. 63). If the delay is caused
by a breach of other obligations of the carrier (loading, previous leg of trans-
portation …), the situation is different and the damage should not be treat-
ed as within the category of delay but within that of other types of damage
(infra, No 9).
c) Misdelivery. Contrary to the solutions advanced within the scope of the
Hague-Visby Rules, misdelivery is currently provided for by the international
convention, which states that the carrier is under the obligation to carry the
goods and above all to deliver them (Arts. 11 and 14). It comes within the
scope of Article 18, and in particular, seemingly with the notion of loss.
Moreover, the provisions on limitation of liability (Art. 62) have a very wide
scope and they certainly cover misdelivery. This innovation is important and
deserves to be approved.
Other losses. The carrier may be held liable in the case of breach of one or
another of his obligations as defined by the convention, even if such breach
does not result in the loss of or damage to the goods. This is the case when the
voyage is interrupted. The carrier should be considered liable under the terms
of the convention, but without his liability being based on the provisions of
Article 18. Such liability cannot but depend upon the force of pre-existing
obligations which have not been performed. There may be doubt about the
solution which should be adopted. If we consider that the obligations of the
carrier are obligations to produce a result, this obligation shall not be subject
to there being evidence of fault. It will be different if we accept the existence
of obligations of means. We must therefore wait for the courts to decide, not-
ing though in advance that the first concept seems more rational.
Another difficulty is to know whether this liability can be indirectly eased
by the provision of liberty clauses, which grant various immunities to the car-
rier. It is not certain that such clauses are still valid, given that Article 82
considers void any clause by virtue of which the carrier seeks to limit or exclude
not only his liability but also his obligations (82-1, a). On this issue, it would
also be interesting to follow the evolution of the case law.
372 philippe delebecque

Finally, we must bear in mind that the UNCITRAL Convention is intended

to apply to the terrestrial segments which either precede the sea carriage or are
subsequent thereto. Undoubtedly Article 26 in this situation reserves the
application of other applicable compulsory conventions (CMR, COTIF-
CIM, CMNI), but even so these conventions must be specifically applicable,
which is not always the case; moreover, the conditions of Article 26 must
apply all together, which suggests that there must be evidence that the loss or
damage was produced during one of the terrestrial phases of the operation.
Otherwise, the UNCITRAL text regains its influence. Hence its great com-
plexity. This complexity also characterizes the numerous procedural rules
contained in the new convention.

III. Complexity as Regards the Rules of Procedure

Jurisdiction and arbitration. The UNCITRAL Convention contains numerous

procedural rules, starting with the rules of jurisdiction, in the proper sense.
Chapter 14 jurisdiction of the courts; in our opinion, this chapter is very
complicated and very misunderstood. There is already the fact that it applies
only if, after ratification, the Contracting State makes a declaration in its
favour (opting-in system). The same goes for chapter 15, providing for arbi-
tration. It should be noted that these chapters are very controversial and they
reverse certain solutions which were considered satisfactory. In the European
Union where Regulation 44/2001 on jurisdiction of the courts is applied and
where the chambers of shipping arbitration are well respected by profession-
als, it is highly unlikely that any State will make a declaration in their favour.
Apart from that, there are two main issues of procedure or quasi-procedure
which are raised: those as regards the parties to the dispute and the time for
legal action.

1. Which Parties?
Plaintiff. The UNCITRAL Convention does not offer any particular indica-
tion as regards the plaintiff in a liability action. On this issue, which is some-
times difficult, one must appeal to the applicable law, it being noted that the
legal systems on this matter are not fundamentally divergent: the plaintiff
must, in any case and in any circumstances, justify his interest in acting and
his capacity to act. It does not matter if he is holder or consignee of a transport
document. Apart from that, the convention has abandoned altogether the
documentary approach which was adopted by the Hague-Visby Rules. In
these circumstances, there is nothing preventing the shipper from beginn-
ing judicial proceedings on liability, claiming for damage suffered by him.
 liability of the sea carrier in the uncitral convention 373

Most frequently though, the proceedings will be instituted by the recipient,

whether contractual or real (see “notify”).
In practice though, it will be the eventual insurers who step into the shoes
of the cargo interests who will continue the action. Therefore, the solutions on
this point should be the same.
Defendant. The identification of the defendant carrier is the first issue to be
dealt with. We know that it is raised when the bill of lading or, more generally,
the transport document does not contain a heading, which is the case for
(traditional) bills of lading issued under a charterparty. The courts in this case
accept a presumption as regards the owner of the vessel: it is he who, save for
evidence to the contrary, is considered to be the carrier. This solution has been
substantially adopted by the convention, with, however, a number of varia-
tions (Art. 37).
We must also specify that the carrier is responsible for his own actions and
for the actions of persons who act at the carrier’s request. The convention very
logically holds the carrier liable for the actions of third parties (Art. 18). Thus,
the carrier undertakes liability for damage attributable to a performing party,
that is, a sub-contractor, i.e. a feeder or a stevedore.
There is nothing though preventing the claimant from directly invoking
the liability of a maritime performing party, and in particular of a handling
agent (but not of the master or crew). The convention provides that the mari-
time performing party which is held liable has the same status as the carrier
himself: it is subject to the same obligations and is entitled to the same excep-
tions and defences (Art. 19). Finally, the liability of the carrier and of any of
the maritime performing parties is joint and several (Art. 20).

2. What Time for Legal Action?

The notice of loss, damage or delay. Article 23 of the convention organizes a
procedure of reservations upon discharge. The adopted solutions do not differ
substantially from those currently known to us (Hague-Visby Rules, art. 3-6).
Indeed, in the absence of evidence to the contrary, the carrier is presumed to
have delivered the goods according to their description in the contract par-
ticulars. This is a simple presumption though, which can be reversed by a
notice of loss or damage given by the person who has a right in the goods. This
notice must be given before or at the time of the delivery if the damage is
apparent. If the damage is not apparent, the notice must be given within seven
days after the delivery of the goods.
In the case of delay, failure to comply with the notice procedure is more
severely sanctioned: indeed, no compensation is payable unless notice is given
to the carrier by the person who has a right in the goods within 21 consecutive
374 philippe delebecque

days of delivery of the goods (23-4). In this case the right is forfeited. In other
cases failure to give notice is sanctioned solely in the field of evidence.
The time for suit. Article 62 of the convention is more innovative. The time
limit for actions which cover claims but not defences or set-offs, is set at two
years, as in the Hamburg Rules. Moreover, it is expressly stated that this period
leads to the forfeiting of right and is not a time bar; nevertheless, this period
may be extended. Finally, the period of two years relates to all suits arising
from a breach of one of the obligations defined in the convention, which
include all actions against the carrier and the shipper.
Volume contracts. The new law of the liability of the international sea
carrier of goods is, as we see it, quite onerous and complex. Once again, this
observation is not a criticism, since, after taking into account the various
interests involved, the number of delegations involved in the preparatory
works and the diversity of legal systems used for reference, it was undoubt-
edly difficult to reach a better solution. The text contains a lot of compro-
mises and is the fruit of discussions which have often been bitter and delicate.
Let us only recall the fierce controversy over freedom of contract and the
famous Article 80.
Article 80, in fact allows the parties to derogate from the convention in the
case of so-called volume contracts, that is contracts of carriage which provide
for the carriage of a specified quantity of goods in a series of shipments
during an agreed period of time (art. 1-2), which is, we must admit, a mini-
revolution as regards sea transport. It will from now on be possible to draft
clauses establishing lower limits of compensation than those provided for in
the convention, or even clauses limiting or excluding the carrier’s liability.
The negligence clauses have also again become valid, although they had been
rejected by all the previous conventions. Hence, an observation which comes
immediately to mind is why construct a new system of liability and in the
long term a new convention, if we at the same time authorize the parties to
undermine the whole structure by this or that derogation which they may
consider appropriate?
When considered, this criticism appears somehow exaggerated. The dero-
gations are in fact subject to serious conditions of substance and of form; in
particular, they cannot be contained in standard form contracts, such as the
bill of lading. Moreover, they cannot affect the fundamental obligation of
shipowners to ensure in a continuous manner that the vessel is seaworthy.
Finally, one should not believe that the derogations agreed in the terms of the
convention are not governed by any law, despite whatever is agreed between
the parties. Common law of contracts and tort, national or, even better, inter-
national, is always there to remind the parties of the requirements of the word
given and of good faith in contracts.
FREEDOM OF CONTRACT AND PUBLIC ORDER RELATIVE TO
THE LEGAL EFFECT OF THE HAGUEVISBY RULES: PROSPECTS
OF ENGLISH LAW AND OF FRENCH LAW

Yves Tassel*

I. Introduction
II. In the International Field are the Hague-Visby Rules Directly Applicable or Does
their Application Depend on the Will of the Contracting Parties?
1. French Law of Conflict of International Conventions
2. French Law of the Paramount Clause
3. English Law: Nature of the Hague-Visby Rules and the Effect of Clauses of
Electio Fori, Electio Iuris and Paramount Clauses
4. Partial Conclusions
II. In the National Field What is the Criterion for the Scope of Application of the
Hague-Visby Rules and What is the Future of the Free in out (FIO) Clause?
1. Scope of Application of the Hague-Visby Rules: Hesitations and Rapprochement
of the French Law and the English Law
2. Free in out (FIO) Clause
III. Conclusions and Suggestions

I. Introduction

Competition is a good of great value in a free economy: it urges people to

outdo each other. It is, for some, the motive power of progress, and this is a
widely acceptable idea. But it also has a negative effect: the need for rules and,
even more, for their application. For this reason, I am of the view that compe-
tition should be safeguarded by rules which are clear, precise and limited in
number but also of effective application.
But there is also another competition, with another objective: ideas. It is
like this, in a certain way, that one can read the present chapter.
We French tend to say that the English do nothing like we do. We do not
claim that they are wrong, but in fact this may cross our minds. I do not
doubt either that reciprocity is allowed. Let me give a little revealing example.
A legal dissertation at a university in France always consists of three parts. On
this matter, I have heard an English colleague, one of the most serious, saying
that the only thing consisting of three parts back home is a hockey match.
What a surprise!

* Professor at the University of Nantes.

376 yves tassel

Anyway, History moulds our way of thinking and the existence of such
diversity is not without merit: it allows us to confront one another. This is the
reason I was attracted by the subject of this chapter. I suggest that we approach
this subject by asking three questions:
(i) If the contract is a matter of will(s), why limit contractual freedom?
(ii) If the contract is a matter of will(s), why draft an international
convention?
(iii) If we draft an international convention, where should we place it in rela-
tion to the will of the contracting parties?
i) If the Contract is a Matter of Will(s), why Limit Contractual Freedom?
This question reminds me inevitably of a phrase of the German philosopher
Kant which I read in a law book: “[a] contract is just because it is wanted and
because one cannot want for oneself an unjust thing”. Nevertheless, the law
contains imperative rules. Why? Perhaps because, as the English say, Business
is Business? This is where we uncover the real conflict and the great problem
of the clash between theory and practice. For, in certain circumstances, the
conditions of formation of the contract weaken the power of negotiation and,
in such conditions of negotiation, the weakness of one of the contracting par-
ties may lead to an unjust situation. This is where public order may intervene
in order to restrict freedom of contract, since it may vest itself with the finality
of protection. Besides, all the shipping nations have had a law on transport of
goods by sea.
All the same, an international Convention has been accepted. Why? This is
the second question.

ii) If the Contract is a Matter of Will(s), why Draft an International Convention?

Three main reasons may be put forward:

- It resolves the difficult issue of conflict of laws, which is good, because a

uniform solution is applied at different places to a given contract.
- It unifies the legal regime of the international contract, which is good,
because the lack of uniformity is, in a sense, shocking.
- It clarifies things, which is good, because a contract never says everything.
Nevertheless, the following question arises:

iii) Where Should such an International Convention be Placed in Relation to the

Will of the Contracting Parties, in Relation to the Contractual Freedom?
It seems to me that this is a question of fundamental importance, because an
international Convention is not an anecdotal thing. From this point of view,
 freedom of contract and public order 377

it is interesting to wonder what this Convention represents for the international

community.
We shall go along with admitting that, having been drafted to avoid the
abuses, this Convention has proposed a balanced system of obligations and
rights, burdening or to the benefit of, each of the parties to the contract of
carriage, the shipper and the carrier. And yet, contested by the newly inde-
pendent nations, this Convention did not avoid the redaction of new interna-
tional Rules. However, a paradox of the Hamburg Rules is that, in great lack
of ratifications, they create a conflict of international conventions and render
uniformity an illusion. Absolute disorder has followed: the contract of the
carriage of goods by sea is now governed by four legal systems: the Hague
Rules, the Hague-Visby Rules, the Hague-Visby Rules plus the Hamburg
Rules. The situation above justifies the present attempt (maybe hopeless) for a
new international convention.
All this seems to have painted the world in black and, in a sense, this (legal)
world is in fact black. Nevertheless, there are in my view undoubtedly a
number of reasons allowing us to be hopeful:
1. There are passages between the legal systems which can no longer be inevi-
tably ignored. An example is the case law on the issue of the application of
the rule of presentation to the bill of lading issued to a named person (Cass.
Com., June 19, 2007, DMF 2007.790, rep. Potocki, obs. Tassel Y.).
2. The desire for uniformity or harmonization of law has not disappeared. An
example is the use of the paramount clause.
3. The support of a legal system for contractual life is necessary, and this in
my view justifies the principle that there is no contract without law.
4. The protection of the weak against the strong party arises from the justice
of law and no legal system can ignore that: See, for example: the European
development of consumer’s law.
5. The promotion of a new common legal order is under construction, as is
manifested by the strenuous effort undertaken and pursued under the aus-
pices of UNCITRAL to produce a global legal system for the contract of
carriage of goods wholly or partly conducted by sea.

Nonetheless, the question of freedom of contract is clearly apparent in this

matter. It is therefore interesting to look at the room left to contractual
freedom and the public order, in view of the effect of the existence of the
Hague-Visby Rules. As a matter of fact, during this investigation we are going
to catch a glimpse of many aspects of an encounter between English and
French law.
As the subject is very wide, my topic will be limited to two issues. They
examine well the two fields of investigation I propose – international law and
internal law.
378 yves tassel

Therefore, I briefly examine:

a) In the international field, whether the Hague-Visby Rules are directly
applicable or whether their application depends upon the will of the con-
tracting parties.
b) In the national field, what is the criterion for the scope of application of the
Hague-Visby Rules and what is the future of the free in out (FIO) clause?
c) To conclude and to make some suggestions.

II. In the International Field are the Hague-Visby Rules Directly

Applicable or Does their Application Depend on the Will of the
Contracting Parties?

In other words, are the Hague-Visby Rules of a contractual nature or, on the
contrary, are they of a mandatory, regulatory nature? The French and English
law answers seem to me very different.
On the matter of resolving the difficulty caused by the conflict of interna-
tional conventions, French law hesitates to take an absolute position and,
unfortunately, the Supreme Court has not been committed on this point.
On the matter of the validity of the paramount clause, French law is ambig-
uous because it adopts two contradictory opinions: (i) that the paramount
clause does not apply if the Hague-Visby Rules apply due to their content; but
(ii) when it applies it is in implementation of the principle of autonomy.
Nevertheless (iii) the law it incorporates is, regardless, of a mandatory regula-
tory nature.
Similarly, English law appears to be also nuanced as it affirms that (i) the
Hague-Visby Rules have been of mandatory regulatory nature since 1971, (ii)
their application requires, in numerous cases, the expression of a particularly
strong will, if we look at the solutions upheld in the presence of an electio fori
(attributive of jurisdiction) clause, of an electio iuris (choice of applicable law
in the contract) contract and of a paramount clause (for the application of the
Hague-Visby Rules).

1. French Law on Conflict of International Conventions

Two decisions of the Paris Court of Appeal (Vessel Lucy [1998] and Vessel Aton
[1999]) show the judges hesitating to side with either the direct application of
the Hague-Visby Rules or their application according to the applicable for-
eign law. The Supreme Court has refrained from resolving the issue.
 freedom of contract and public order 379

Vessel Lucy, Paris CA, December 2, 1998, DMF 1999.732

The Bill of Lading was issued at the port of shipping in Mombassa, Kenya.
The port of discharge was Livorno, Italy. The sea carrier (P&O Containers)
was established in the UK. The court to which the matter was referred was in
Paris. Kenya had ratified the Hamburg Rules. Italy had ratified the Visby
Rules and denounced the Hague Rules. Which law applied to the Bill of
Lading: the Hamburg Rules, the Visby Rules, the Hague Rules?
The plaintiff claimed that the Hamburg Rules applied because Kenya had
ratified them and because the Bill of Lading was issued in that country, which
was also the place of shipment.
The French judge took the opposite view: “[s]ince France has not ratified
them, the plaintiff cannot invoke these Rules alone in order to claim that they
are applicable”. So, in order to determine the applicable law, the French judge
applied the conflict of laws method. Since the parties had not made a choice
of law, he decided that the law applicable to the contract of carriage was the
law of the country in the territory of which the contract was located. He
considered that the contract of carriage was located at the place of its execu-
tion, which was the place of destination, in this case Italy. An expert
witness in the shape of an Italian lawyer indicated to the judge that Italy
applied the amended Hague-Visby Rules. Since Kenya had not
denounced the Hague Rules, the French judge applied the amended Hague-
Visby Rules.

Vessel Aton, Paris CA, May 5, 1999, DMF 2000.346

The transport began in the UAE and ended in Egypt. Egypt had ratified the
Hamburg Rules but had postponed the denunciation of the Hague-Visby
Rules. The Bill of Lading was issued in the UAE, which was the place of ship-
ment. The carrier was established in Egypt. Which was the applicable law?
The French judge rejected the application of the Hamburg Rules because
they had not been ratified by the UAE, and he consequently decided that the
Hague Rules were applicable because of their content. No reference was made
to the conflict of laws method.
Curiously enough, the Supreme Court has not interfered in this conflict
of methods and has left the lower courts free to decide. It does not give a
definitive solution to the debate on the legal nature of these conventions:
a mandatory law or a law the application of which partly depends on the will
of the contracting parties.
380 yves tassel

2. French Law of the Paramount Clause

The French judge considered that the paramount clause did not apply if the
Hague-Visby Rules were applicable because of their content (Vessel Ville de
Sahara, Cass. Com. June 20, 1995, DMF 1996.382, obs. Rémery).
If this is not so, the paramount clause applies and the Hague-Visby Rules
apply because of freedom of contract (Vessel World Apollo, Cass. Com. May 28,
2002, DMF 2002.613, rep. De Monteynard). The tvoyage began in Thailand,
which had not ratified the Hague Rules, and ended in Senegal, which had
ratified the Hamburg Rules without denouncing the Hague Rules. The court
considered that the Hamburg Rules did not apply whereas the Hague Rules
did, because the parties had chosen them with the paramount clause and
because there was no mandatory convention which negated this choice.
However, even when the rules apply due to the effect of the paramount
clause, the law incorporated in the contract is mandatory regulatory law (Vessel
Hilaire Maurel, Cass. Com. February 4, 1992, DMF 1992.289 obs. Lemaitre,
Rev. Crit. DIP 1992.495 n. Lagarde).

3. English Law: Nature of the Hague-Visby Rules and the Effect of Electio Fori,
Electio Iuris and Paramount Clauses
I believe that according to the COGSA 1971 the Hague-Visby Rules are man-
datory law superior to contract law (the Morviken) but there are numerous
cases which restrict the application of the Hague-Visby Rules whenever the
situation does not require their application, that is, to be precise, in the pres-
ence of an electio fori, an electio iuris and a paramount clause (Vita Food, the
Komninos S, the European Enterprise, in addition to criticism made to the
Morviken).
The Morviken [1983] (transport from Leith to the Dutch Antilles of a
machine and a Bill of Lading which made the choice of Dutch law and attrib-
uted jurisdiction to the court of Amsterdam – damage due to discharge – if
the Dutch law was to be applied, the limitation was £250 (Hague Rules); if,
on the contrary, English law applied, the limitation stood at £11,000 (Hague-
Visby Rules) ). I think that the House of Lords decided that the expression
force of law required the direct application of the Hague-Visby Rules and
consequently attributed to them a mandatory regulatory nature. It refuse to
give effect to the choice of law clause, since it would be contrary to article 3.8
which forbids limitation of liability. To give effect to the electio iuris clause
would be to admit a ploy ruining the effect of the Hague-Visby Rules.
In Vita Food [1939] (Privy Council) (Bill of Lading issued at Terre Neuve),
on the contrary, it was held that, in the absence of a paramount clause and in
 freedom of contract and public order 381

the presence of an electio iuris clause nominating English law, the Hague-
Visby Rules were not applicable because they were of a contractual nature.
The Komninos S [1991] (transport from Greece to Italy – clause attributing
jurisdiction to London) confirmed that contractual nature by holding that an
express electio fori clause which led to an implicit wish to make an electio iuris
for English law did not lead to an implicit wish to incorporate the Hague-
Visby Rules.
The European Enterprise [1989] did not say anything different when hold-
ing that, in the presence of a non-negotiable receipt, which did not give rise
to any primary contractual warranty, the presence of a contractual paramount
clause which partially incorporated the Rules was not capable of attributing a
mandatory regulatory nature to them.
In addition, the contractual nature of the Hague-Visby Rules has been
upheld by numerous authors who have criticized the solution adopted by The
Morviken (Jackson, Mann, Diamond and Morris).
The Morviken is even more interesting since the mandatory regulatory
nature of the Rules it adopted was the solution upheld by French law in the
Vessel Hilaire Maurel [1992] decision: the Rules, even when they became
applicable by reason of the paramount clause, were mandatory law that the
contracting parties could not contract out of.
I would add that French law does not share the point of view expressed in
The Vita Food and in The Komninos S. The French Supreme Court holds that
article 16 of the law of 1966 is a law of immediate application, resulting in the
renvoi to French law was sufficient to make the Hague-Visby Rules applicable
even if the international transport had departed from or was destined for a
French port.

4. Partial Conclusions
Much has been written about the legal nature of the Hague-Visby Rules in
both judicial systems.
With the COGSA 1971, English law has come closer to French law in
considering that the Hague-Visby Rules have a mandatory regulatory nature
(The Morviken, Vessel Hilaire Maurel ). However, this view is criticized in both
France and the UK.
With the paramount clause we come across a divergence of opinions:
French law stipulates that, when incorporated, the Rules are mandatory law
(Vessel Hilaire Maurel ), whereas English law holds that they are contractual
law (The European Enterprise).
Finally, the electio iuris (choice of contract law) clause leads to a contrary
solution: in English law it suffices to make the Hague-Visby Rules applicable
382 yves tassel

(Vita Food and The Komninos S ); in French law, on the other hand, it is suffi-
cient (Vessel Hilaire Maurel ).
Nevertheless, if we add, in French law, the freedom left to the lower courts
to choose between direct application of the Rules and the conflict of laws
method, we may say that, at the end of the day, the analysis of the two laws
makes it clear that the contractual will yield only slightly when opposed to the
Hague-Visby Rules. In the international field, I am under the impression that
the will of the parties and public order are placed on an equal footing. What
about the national field?

II. In the National Field, What is the Criterion for the Scope of
Application of the Hague-Visby Rules and What is the Future of the
Free in out (FIO) Clause?

The issue of the contractual will in the national field has widely focused on the
very delicate question of the scope of application of the Hague-Visby Rules.
In this respect, I can see hesitations on the meaning of the rule both in English
(Pyrene v Scyndia and The Coral ) and in French law (Vessel Fort Royal ).
Moreover, the free in out clause is a very good laboratory in which to study
this issue of will and public order. The study of French and English law
demonstrates that French law is without doubt on the path to rejoining
English law.

1. Scope of Application of the Hague-Visby Rules: Hesitations and

Rapprochement of French and English Law
Pyrene v Scindia [1954] leans the scales on the side of freedom of contract.
This is doubly the case: by the existence of an implicit contract of carriage
which binds the fob shipper and the carrier and by the affirmation of the con-
tractual delimitation of the scope of application of the Hague-Visby Rules.
The Captain Gregos [1990] says the same: the Hague-Visby Rules apply to
a contract and not to specific operations.
The Coral produced a different opinion, that of Mr. Justice Sheen, at the
time judge of the Admiralty Court. Nevertheless the Court of Appeal over-
turned that judgment. However, Professor Nick Gaskell has criticized the
Court of Appeal’s decision.
French law is undoubtedly in the course of rapprochement towards the
position of English law. In Vessel Fort Royal, Cass. Com. November 15 2005
(DMF 2006.146, obs. Tassel), the question was raised whether a contract
could deal with the liability of the sea carrier. Here is how it does.
 freedom of contract and public order 383

While there was a very fierce strike going on in the port of Fort-de-France
(Martinique), the shipper arranged and the carrier accepted despite every-
thing transport to this port. The vessel diverted to Pointe-à-Pitre (Guadeloupe).
Who should pay for the cost of transshipment and the second transport? The
insurers of the recipient claimed that it should be the carrier; the carrier on the
contrary claimed that it should be the recipient. According to the carrier, the
shipper when accepting the transport in full knowledge that there was a fierce
strike going on, accepted that the risk weighed on him and not on the carrier
as the law stipulated. The Supreme Court did not take a clear position and
said: “the provision entered into between the shipper and the carrier that dero-
gates from the provision of law…, cannot be opposed to the recipient unless
it is accepted by him and under the condition that it does not contravene the
law. Having said that, the question remains unanswered.

2. Free in out (FIO) Clause

The validity of the free in out (FIO) clause depends a priori on the perception
regarding the scope of application of the Hague-Visby Rules: if they govern
operations, the clause is void because loading and discharge of the vessel are
the carrier’s responsibility; however, if the Rules govern a contract, the clause
may be valid because loading and discharge of the vessel may not be considered
as part of the contract. French law provides that the Rules govern operations.
English law provides that they govern a contract (Pyrene v Scindia).
But the question is often put differently in the presence of a Bill of Lading
issued for the execution of a voyage charterparty, which is held by a third party
to the charterparty, which is the case in a CIF sale. The debate is less sharp
because everyone accepts that the content of a voyage charteparty is based
entirely on freedom of contract. So, while acknowledging that the provisions
of the contract which bind the third recipient CIF buyer to the shipowner
must be read in the Bill of Lading, we consider that the content of a charter-
party may be incorporated in the Bill of Lading. Thus the debate is shifted to
the manner of incorporation of charterparty clauses into the Bill of Lading: is
a general reference sufficient or should it be specific?
English and French law are, on this point, on the same wavelength: it
depends on the relevant provision every time: is it germane to the contract of
carriage or is it part of the economy of the contract of carriage? This point will
not be further analyzed as it has been extensively dealt with in a separate
publication (DMF 2007, 728–739).
At the end of this demonstration we can affirm that the contractual will
is fully safeguarded: the will of the recipient by HIS knowledge of the
384 yves tassel

incorporation [don’t understand] and the will of the shipowner who does not
face obligations he has not undertaken.
From the conclusions that are to be extracted from the preceding discussion
some suggestions may be put forward.

III. Conclusions and Suggestions

Three questions may be addressed in brief:

a) How deep is the divergence of the judicial systems?
b) How should one overcome them?
c) What suggestions should be made?
a) Regarding the first question, my answer is negative, whether the issue
involves the direct application of the Rules (The Morviken, Vessel Aton), their
legal nature (GOGSA 1971, Vessel Hilaire Maurel) or their scope of contrac-
tual application (Pyrene, Vessel Fort Royal).
b) How to overcome the differences which remain between the judicial
systems while protecting the weaker of the contracting parties? It seems to me
that the only method is to take into account the diversity of different types of
transportation, using as a guideline the power of negotiation of each of the
contracting parties.
c) Suggestions which could be used as part of a discussion over the ratifica-
tion of the UNCITRAL Convention:
1. Qualify the types of transportation as regards the power of negotiation:
voyage charter; regular transports which are not liner transports or liner trans-
ports which involve contracting parties of equal power, i.e. contract of
affreightment; regular liner transports involving a professional and
“consumers”.
2. Define the freedom of contract by affirming clear fields of application of
a contractual law and of a mandatory law. This appears to be the most urgent
and the most viable thing to do.
 ISSUES ARISING FROM THE LIMITATION
OF LIABILITY IN THE MARITIME
TRANSPORT OF PASSENGERS

Eleni Gologina-Economou*

I. Introduction
II. Links between the Athens Convention of 1974/1976 and the 1976 London
Convention
III. Convergence and Divergence of the Provisions Relating to Limitation of Liability
in the Athens and London International Conventions
IV. Issues Arising from the Application of the Above Conventions
1. International Carriage
2. Domestic Carriage
3. International and Domestic Cruise
V. Conclusions

I. Introduction

As is well known, the institution of the limitation of liability has become a

fundamental principle of maritime law.1,2 It was originally introduced for the
benefit of maritime operators.3 Today the institution is justified by the fact

* Associate Professor of Commercial Law, Faculty of Law, Aristotle University of

Thessaloniki
1
See Christodoulou F., The ship as special element of the Shipowner’s property in “The
Protection of Maritime Creditors”, 1st International Conference of Maritime Law, 28–30 May
1992 (Minutes and Reports, Piraeus 1994), pp. 86–87. For the historical evolution of the
institution, see Passias J., The Limitation of Shipowners’ Liability, 1949, p. 18; Sotiropoulos P.,
Die Beschränkung der Reederhaftung, 1962, p. 10 et seq; Selvig E., An Introduction to the
1976 Convention in “The Limitation of Shipowners Liability: The New Law”, Institute of
Maritime Law, The University of Southmapton, 1986, p. 3 et seq; Griggs, Limitation of Liability
for Maritime Claims: the Search for International Uniformity [1997] LMCLQ, 369 et seq;
Haddon-Cave, Limitation against passenger claims: medieval, unbreakable and unconscionable,
CMI Yearbook 2001, 234–235; Wilson J., Carriage of Goods by Sea, 5th ed., 2004, p. 194;
Kiantou-Pampouki, Maritime Law T.I, 5th ed., 2005, § 71 p. 325 (in Greek); Athanassiou L.,
The debate on the limitation of liability for maritime claims, 2005, p. 30.
2
Although limitation of liability is mainly a maritime institution, it is established in all types
of carriage of passengers or goods. See Rèmond-Gouilloud, Droit maritime, 2nd ed., 1993,
p. 1994; Rodière R-du Pontavice E, Droit maritime, 12th ed., 1997, p. 29 et seq.
3
See in detail, Antapassis An., The limitation of liability in maritime claims. Legal opinion
[1997] Κοινοδíκαιον (Law Review), p. 36 et seq. (in Greek); idem, Issues arising from the limi-
tation of liability for maritime claims. Legal opinion [2004] EEμπΔ (Commercial Law Review)
660–661 (in Greek); Christodoulou F., op. cit. p. 96.
386 eleni gologina-economou

that insurance cover for damages cannot be limitless, in the sense that it can
cover all damage which may arise in an exceptional case. Besides, even if such
insurance coverage were possible, the cost would be particularly high and
would render the commercial operation of ships unprofitable. Consequently,
only if the liability of maritime operators is limited can the insurance risk be
fully covered by a reasonable premium which is not a burden on the cost of
operating the ship.4 This last reason is extremely important nowadays. In this
sense, the limitation of liability is undoubtedly of benefit to insurers, because
they can project the amount they would have to pay if the insurance risk were
to occur. At the same time premiums remain accessible and the maritime
operators can operate on a competitive basis.5 It is therefore fair to say that
today the institution exists primarily to secure the insurance cover required to
meet the liability of maritime operators, and to a lesser extent for the other
reason mentioned.6
In addition, the institution is believed to act as a counterweight to the strict
liability held by the maritime carrier.7 Indeed, in all legal systems, both inter-
national and national, the liability of maritime operators is described in great
detail. One significant dimension is the counterbalancing effect that the limi-
tation of this liability has on the overall operation of maritime operators.
Consequently, the institution works in favour of the maritime operators,
whom it protects from the filing of excessive and possibly groundless claims
by injured parties.8
In Greek law, liability and its limitation in respect of the carriage of pas-
sengers and their luggage by sea are dealt with by two separate branches of
legislation. Domestic carriage is governed by maritime law (KIND – the
Code of Private Maritime Law) and, to a great extent, by civil law applied by
analogy (the Civil Code, AK), while international carriage is governed by the
International Athens Convention of 1974/1976.9 Moreover, through a

4
For this issue, see Seward, The Insurance Viewpoint, in “The Limitation of Shipowner’s
Liability: The New Law”, Institute of Maritime Law, The University of Southampton,1986,
p. 163; Christodoulou F., op. cit., p. 96.
5
Seward, op. cit., p. 164.
6
For the appreciation of the Convention on Limitation of Liability for Maritime Claims,
1976, see Athanassiou, L., op. cit., p. 166 et seq.
7
See Rocas, K., Maritime Law, 1968, § 44 p. 169 (in Greek); Deloucas N., Maritime Law,
2nd ed., 1979, § 215 p. 349, (in Greek); Mandaraka-Sheppard, A., Modern Admiralty Law,
2001, p. 878.
8
Kiantou-Pampouki, A., The Limitation of Sea Carrier’s Liability from a Comparative Point
of View [1992] KNoB (Law Review of Cyprus), 5; Wilson, op. cit., p. 265.
9
Greece has been an international party since 15 May 1991 (L. 1922/1991). The Athens
Convention entered into force internationally on 28 April 1987. The Convention was only
designed to regulate the sea-carrier’s liability for damages for death, personal injury and loss of
or damage to luggage. See Gologina-Economou E., International Carriage of Passengers and
 limitation of liability in maritime transport of passengers 387

legislative intervention the 1976 International London Convention, “On

Limitation of Liability for Maritime Claims” has been ratified,10 the provi-
sions of which uniformly apply both in international relations and, as is
quite correct, in purely national ones.11 However, recent developments in the
international texts mentioned above have had little impact on Greek national
law. Thus, the 1990 and 2002 Protocols amending the Athens Convention
have not been ratified and in any case have not come internationally into
force.12 On the other hand, the 1996 Protocol amending the London
Convention (LLMC PROT 1996) has been ratified and came into force
internationally four years ago.13 Greece has not yet been an international
party to this Protocol.
In practice, the coexistence of the above legislative texts gives rise to a
number of issues, which are of particular concern to Greece for the following
reasons. Greek passenger shipping has undergone dynamic growth in recent
years, particularly in relation to connections between two Greek ports (Patras
and Igoumenitsa) and five Italian ports (Brindisi, Bari, Ancona, Venice and
Trieste);14 domestic carriage is carried out by passenger liners, the vast major-
ity of which form the principal means of mass passenger transport.15 In addi-
tion, there has also been an impressive growth in the area of cruise liner activity
in both the Aegean and Mediterranean Seas, with encouraging prospects for
the future.16
This chapter aims to identify and analyse the issues which arise from the
application of the above legislative texts, a task which necessarily involves
studying the provisions of the texts relevant to this study.

their Luggage by Sea and Civil liability (Athens Convention 1974/1976 and Protocol to the
Athens Convention 2002) 2007, passim.
10
L. 1923/1991.
11
Passias P., The New Law of the Limitation of Liability for Maritime Claims (Convention
of London 1976) [1992] (Maritime Law Review) 279, 289 (in Greek); Antapassis A., [1997]
Κοινοδíκαιον, op. cit., 36, 47 et seq.; idem., The Need of Renew the Maritime Legislation,
[1997] ΕπισκΕμπΔ (Commercial Law Review) 2 (in Greek); Liacopoulos Th., The Limitation
of Liability for Maritime Claims (Convention of London 1976) [1997] ΔΕΕ (Law of
Commercial Enterprises and Associations) 653 et seq. (in Greek); Kiantou-Pampouki, A.,
Maritime Law, op. cit., § 77 p. 347. See also the decisions of Piraeus Court of Appeal 169/1998
[1999] ΕΕμπΔ 119; Areios Pagos (the Greek Supreme Court) 869/1999 (unpublished).
12
See for details, Gologina-Economou E., op. cit., p. 45 et seq.
13
The Protocol entered into force on May 13, 2004. More details in www.imo.org/
Conventions/mainframe.
14
Two million passengers travel from the Greek ports of Patras and Igoumenitsa to the
Italian ports. See http://www.patrasport.gr/.
15
In the domestic carriage a modern ferry has the capacity to carry a large number of pas-
sengers, usually 800–1,800. See for example, Piraeus Court of Appeal 1058/2003 [2004]
Ναυτ.Δικ. (Maritime Justice, Law Review) 256 (in Greek).
16
See in detail, Gologina-Economou E., op. cit., p. 8 et seq. and accompanying footnote.
388 eleni gologina-economou

II. Links between the Athens Convention of / and the

 London Convention

The institution of limitation of liability may be found in the international

conventions which govern all types of carriage of passengers and their lug-
gage.17,18 Thus, special provision is made in the 1974 Athens Convention (in
Articles 7 and 8, to be precise). According to this provision, a carrier may
invoke limitation of liability when individual claims or a limited number of
passenger claims are brought against him for damage caused during the per-
formance of a particular contract of carriage (by sea, air, rail or road). Therefore
the carrier exercises the right of limitation of liability against each passenger
with whom he has entered into a contractual relationship; that is to say, he
compensates each individual passenger. It may be concluded, therefore, that
in the International Athens Convention, as in all other international conven-
tions, the limitation of liability applies on an individual level.19 Compensation
is therefore paid on an individual basis.
On the other hand, in the abovementioned London Convention of 1976,
known internationally as LLMC 1976,20 the limitation of liability is of a glo-
bal nature.21 This interpretation can be directly drawn from the formulation
of Paragraphs 1 and 2 of Article 9 of the Convention. Indeed, the provisions
made in these paragraphs stipulate that the limits of liability determined in
Articles 6 and 7 of the same Convention apply to the aggregate of all claims
arising from the same incident.22 It is worth noting that global limitation of

17
See the private international conventions: Montreal 1999 (Carriage of passengers and
their luggage by air, articles 21, 22 §§ 1, 2, 30); Convention COTIF/CIV (Carriage of pas-
sengers and their luggage by train, articles 30, 31); and, finally, Convention CVR (Carriage of
passengers and their luggage by road, articles 13, 16).
18
See also the International Conventions which govern the other types of carriage of goods:
Hague-Visby Rules (Carriage of goods by Sea, article 4 § 5); Convention CMR (Carriage of
goods by road, article 23); Convention COTIF/CIM (Carriage of goods by train, articles 40,
42, 43); Hamburg Rules, 1978 (Carriage of goods by Sea, article 6); and, finally, Montreal
Convention, 1999 (Carriage of goods by air article 22 §§ 3, 4).
19
Gaskell N., The Amount of Limitation, in “The Limitation of Shipowners’ Liability: The
New Law”, Institute of Maritime Law, The University of Southampton, 1986, p. 54; Griggs-
Williams, Limitation of Liability for Maritime Claims, 3rd ed., 1998, p. 42.
20
LLMC means Limitation of Liability for Maritime Claims. See in detail, Griggs-Williams,
op. cit., pp. 3–72. See for further analysis, Kiantou-Pampouki, Maritime Law, op. cit., §§ 71–108,
pp. 325–487.
21
For the history of the London Convention, see Selvig, An Introduction to the 1976 Con-
vention, in “The Limitation of Shipowners’ Liability: The New Law”, Institute of Maritime
Law, The University of Southampton, 1986, p. 4 et seq.; Athanassiou, op. cit., p. 44 et seq.
22
The term “dinstict occasion” has the same meaning as the term “same occurrence” or
simply “occasion” in the Greek translation of the London Convention. See Kiantou-Pampouki,
Maritime Law, op. cit., § 100 p. 448.
 limitation of liability in maritime transport of passengers 389

liability23 comes into effect only if the liability for the damage provided for in
the London Convention and the obligation to pay compensation arise from
international conventions or national laws, and provided that the same
Convention has been ratified by the relevant states. Indeed, according to
Article 2§1 of the London Convention, the global limitation of liability is
independent of the legal basis of liability of the maritime debtor. Therefore the
limitation of liability applies to claims arising from breaches of contract, torts,
recourse or any other cause. Consequently, the right of limitation of liability
is exercised by the maritime debtor against both his contracting party and any
other third person who suffers damage as a result of his own acts or omissions
or on the part of persons for whom he is liable.24
A careful reading of Article 2§1 of the London Convention reveals that the
claims listed include those of “loss of life or personal injury” and “loss of or
damage to property”, provided that these occur on board or are directly con-
nected with the operation of the ship. It may therefore be concluded that
claims in respect of the death of or personal injury to a passenger are identical
to those in Article 3 of the Athens Convention, which, according to Articles 7
and 8 of the same Convention, are subject to the limitation of liability of the
carrier.25
In the meantime, it may be observed that in the London Convention the
concept of “passenger” is defined in Article 7§2. A passenger is defined as a
person who is carried under a contract of carriage, or a person without a con-
tract who, with the consent of the carrier, is accompanying a vehicle or live
animals whose carriage is covered by a contract for the carriage of goods (not
governed by this Convention). It is evident, therefore, that the above defini-
tion of “passenger” corresponds exactly with the definition of “passenger” in
Article 1§4 (a) and (b) of the Athens Convention.26 On the other hand, claims
for loss of life or personal injury to persons who are not regarded as passengers
in the above sense – that is to say, claims brought by all other persons on
board – are subject to another provision of the London Convention.
Consequently, crew, persons who work on the ship under a contract of employ-
ment or visitors or stowaways are excluded. Indeed, the above mentioned

23
According to Articles 11 et seq. of London Convention, 1976, “any person alleged to be
liable may constitute a fund with the Court or other competent authority in any State Party in
which legal proceedings are instituted in respect of claims subject to limitation”. For more
details, see Kiantou-Pampouki, op. cit., § 105 p. 466 et seq. Anyway, in Greek law the shipowner
can limit his liability without constitution of a limitation fund. See for this issue generally,
Kiantou-Pampouki, op. cit., § 101 p. 451 et seq.
24
See on all this, Kiantou-Pampouki, op. cit., § 89 p. 398 et seq.
25
For this subject, see Gologina-Economou, op. cit., § 2 p. 125 et seq.
26
See in detail, Gologina-Economou, op. cit., § 1 p. 94 et seq.
390 eleni gologina-economou

claims of these persons are subject to the limits provided for by Article 6§1
(a), regardless of the fact that the Athens Convention does not constitute the
legal basis of the liability of the carrier towards those on board ship.27
Moreover, according to Article 2§1 (a) of the London Convention, the limi-
tation of liability also covers claims in respect of losses suffered as a conse-
quence of the original loss of life or personal injury which occurred on board.
In other words, if the injuries suffered by a passenger in the course of his or her
carriage by ship result in death, then claims may be brought for funeral expenses
etc.; or if a passenger’s injuries on board ship result in subsequent damage, this
may give rise to claims for expenses in respect of medical examinations or
medical or hospital treatment, maintenance costs for the members of his or her
family, or even claims in respect of his or her incapacity to work.28
Additionally, in the London Convention the limitation of liability also cov-
ers claims in respect of loss of or damage to property, as has already been
mentioned. Therefore under the limitation of liability here there is no refer-
ence to claims in respect of loss of or damage to passengers’ luggage. It is
accepted, however, that such damage may be covered by the claims listed in
Article 2§1 (a) of the Convention, which refers to the loss of or damage to
property.29 Indeed, in Article 1§5 of the Athens Convention “luggage” is
defined as “any article or vehicle carried by the carrier under a contract of car-
riage”.30 Moreover, in our opinion in the London Convention the interna-
tional legislator intended to include the limitation of liability for luggage in
the term “damage to property”. As is obvious, Article 2§1 (b) of the Convention
goes as far as to make provision for limitation of liability in respect of damage
caused by a delay in the carriage of luggage, an issue which will be dealt with
later.
On the other hand, Article 19 of the Athens Convention stipulates that:
“This Convention shall not modify the rights or duties of the carrier, the
performing carrier, and their servants or agents provided for in international
conventions relating to the limitation of liability of owners of seagoing ships”.
It is clear that the Article refers to the London Convention and aims to estab-
lish a link between the two conventions. It is accepted, then, that these two
conventions coexist, and in fact this is why the same maximum limit of liabil-
ity per passenger was provided.31 Thus, if in a shipping incident the total

27
See in particular, Kiantou-Pamouki, op. cit. § 99 p. 446 and § 96 p. 429 et seq.
28
See, Kiantou-Pampouki, op. cit., § 90 p. 401 et seq.
29
Gaskell N., The Amount of Limitation, op. cit., p. 53.
30
See in detail, Gologina-Economou, op. cit., § 1 p. 100 et seq.
31
See Gaskell N., The Zeebrugge Disaster: Application of the Athens Convention 1974
[1987] NLJ 285, 287. The author refers examples arising from the shipping incident of “Herald
of Free Enterprise”, which occurred in 1997.
 limitation of liability in maritime transport of passengers 391

amount of individual compensation payments under the Athens Convention,

which represents the total of all the amounts arising from the individual liabil-
ity limits prescribed in that convention, exceeds the amount provided for by
the London Convention, preference is given to the limitation of liability
defined in the latter convention.32

III. Convergence and Divergence of the Provisions Relating

to Limitation of Liability in the Athens and London
International Conventions

The limitation of liability of the carrier in the Athens Convention is quantitative

in the sense that a maximum compensation limit is set over and above which the
carrier has no obligation towards the claimant. Indeed, this maximum compen-
sation limit also applies when the passenger has more than one claim arising
from the original loss of life or personal injury, or loss of or damage to luggage.
For example, the claims may relate to hospital expenses, financial redress for
personal injury or mental distress or the incapacity to work etc. This has to do
with the aggregation of claims provided for in Article 12§1 of the Athens
Convention. It should be noted that the above rule prohibiting any payments in
excess of the maximum compensation limit provided for by the Convention
also applies when more than one person bears a liability towards the passenger
(Article 12§§2 and 3). It is worth pointing out that, in this particular case, the
total of the amounts that those liable for compensation are obliged to pay can-
not exceed the maximum limits provided by the Convention.33
It should also be noted that the limits of liability are not uniform but differ
according to nature of claim. Liability limits are therefore set for each category
of claim, or even for more specific subcategories within a particular category
(for example the limits in the categories of luggage). These limits form the
means of calculating the maximum amount of compensation and are deter-
mined on the basis of a specific monetary unit of account, the SDR (Special
Drawing Right).34
Under the Athens Convention, the maximum limit of liability for the death
of, or personal injury to, a passenger is currently 46,666 SDRs per passenger,

32
See generally, Kiantou-Pampouki, op. cit., § 89 p. 399.
33
See specifically Kiantou-Pampouki, op. cit., § 100 p. 446.
34
The 1976 Convention has taken the SDR (Special Drawing Right) as the basic unit of
account, in order to avoid problems with gold. As is known, the SDR, which has been strongly
criticized as unit of account, is determined daily by the IMF (International Monetary Fund)
and based on market exchange rates. For more details, see Gaskell N., The Amount of Limitation,
op. cit., p. 36 et seq. and 40.
392 eleni gologina-economou

per carriage. Consequently the limit of liability applies to each individual pas-
senger claim. It applies not only when the compensation is awarded as a lump
sum by the court seized of the case but also when it is awarded in the form of
periodical income payments (Article 7§1[b]).35 The maximum liability limit is
calculated by converting the SDR value into the national currency of the state
in which the court seised of the compensation proceedings is located. Indeed,
the court takes into account the official value of the SDR on the date on
which the case is tried (Article 9 of the Convention).36 The same maximum
liability limit of the carrier for death or personal injury per passenger applies
in the London Convention (Article 7§1).
In the Articles of the two International Conventions mentioned above a
significant divergence in the provisions relating to liability limits may be
observed. In the Athens Convention these limits are defined as Units of
Account “per passenger, per carriage”, with the duration of a carriage being
defined by Article 1§8 of the same Convention.37 On the other hand, accord-
ing to Article 9 of the London Convention, the limits of liability defined in
Articles 6 and 7 of the same Convention apply to the aggregate of all claims
arising from “a distinct occasion”.38 Therefore, in the Athens Convention the
fact that the limit of liability applies “per carriage” means that if a passenger
were injured twice in the course of the carriage, the maximum liability limit
would apply only once. In contrast, under the London Convention if a pas-
senger were injured in two separate incidents in the course of the carriage, the
liability limit would not cover the claims of each individual passenger but
the total amount of the claims arising from each particular incident, up to the
maximum limit of liability.39 Therefore, the question of liability is dealt with
separately on each occasion and, of course, the compensation limits are
renewed in the sense that a new limitation of liability applies for the claims
arising from each separate incident.
Furthermore, in the London Convention the method of calculating the
amount of compensation due is based on the maximum number of passengers
the ship can carry. To be precise, Article 7§1 of this Convention provides that

35
See in detail, Korotzis J, Maritime Law, v. 2, 2005, p. 526 (in Greek).
36
The IMF published its rates daily but these are normally available in the press, on the fol-
lowing day. Gaskell N., op. cit., p. 37.
37
This period covers embarcation and disembarcation, including the ship to shore transfers
provided by carriers in many ports. But loss on the quayside or in a marine terminal is not
covered. For further analysis, see Gologina-Economou, op. cit., § 1 p. 116 et seq.
38
The 2002 Protocol of Athens Convention relating to the carriage of passengers and their
luggage 1974 provides a limit of liability “per passenger on each distinct occasion”. This provi-
sion is similar to the 1976 London Convention (LLMC 1976).
39
See Griggs-Williams, op. cit., p. 42; Liacopoulos, op. cit., [1997] ΔΕΕ 651–652.
 limitation of liability in maritime transport of passengers 393

the amount of 46,666 SDRs should be multiplied by the number of passen-

gers that the ship is authorised to carry according to the ship’s certificate and
not the actual number of passengers on board at the time the incident causing
death or personal injury occurred.40 The product of this multiplication may
not exceed 25 million SDRs, which is the global liability limit and constitutes
a special limitation fund in respect of claims for loss of life or personal injury.41
As a result, this limit significantly reduces the amount of compensation that
may be awarded to passengers, particularly in the case of a passenger ship car-
rying a large number of passengers. Consequently, the smaller the number of
passengers travelling on a ship which is certified to carry a larger number of
passengers, the greater the liability limit for each individual passenger.42

IV. Issues Arising from the Application of the Above Conventions

1. International Carriage
As follows from the above, a maritime carrier performing an international car-
riage of passengers reserves the right to limit his liability not only for indi-
vidual claims “per passenger, per carriage” under the Athens Convention but
also for the aggregate of all claims arising on any distinct occasion under the
London Convention. However, the 1996 Protocol amending the London
Convention increases the Units of Account to 175,000 SDRs per passenger
for each distinct occasion. In the meantime, the maximum limit of 25 million
SDRs currently provided for is removed by the above Protocol.43 Therefore,
the amount of 175,000 SDRs is multiplied by the number of passengers the
ship is authorised to carry and the result constitutes the total liability limit,

40
Article 7 of the 1976 Limitation Convention introduces a separate limit of liability where
there is loss or personal injury to a passenger carried in a ship. The Article 7 limit is entirely
separate from the Article 6 § 1 limits. This Article makes it clear that its limits apply to claims
other than those mentioned in Article 7. The separate treatment of passengers will ensure that
they will not have to share in the general limitation fund. Thus, this separate limitation fund is
available only when there are claims for loss of life or personal injury to passenger. See Herber
R., Seehandelsrecht, 1999, Article 7, p. 80; Gaskell N., op. cit., p. 54 et seq., note 5; Griggs –
Williams, op. cit., p. 41.
41
See Kiantou-Pampouki, Maritime Law, op. cit., § 99 p. 445.
42
See Gaskell N., op. cit., p. 54, who refers to examples from the following passenger ships:
the “Royal Princess”, the “Mikhail Lermontov” and the “Queen Elizabeth II”.
43
An amount of 175,000 Units of Account (SDRs) is also provided in the Protocol of 1990
which amended the Athens Convention (not yet in force). Anyway, this change in the 1996
Protocol will be of particular significance for the operators of larger passenger ships. See in
detail, Gaskell N., Revision of the Athens Convention on the Carriage of Passengers and their
Luggage 1974, in “Liability to pay damages under Greek and International Maritime Law”, 4th
International Conference on Maritime Law, Piraeus 6th - 9th June 2001, I. (Reports, Piraeus
2001), p. 158.
394 eleni gologina-economou

which forms a special limitation fund in respect of claims for loss of life or
personal injury. Be this as it may, the significance of the global limitation of
liability will dwindle if there is no significant increase in the maximum liabil-
ity limit prescribed by the Athens Convention.44 Indeed, in such a case the
total of the amounts arising from the individual limitation of liability in the
Athens Convention will not exceed the global liability limit provided for in
the London Convention. Consequently, once the 1996 amending Protocol is
ratified by Greece, maritime carriers performing international carriage will
opt for individual limitation of liability. On the other hand, if Greece ratifies
the 2002 Protocol amending the Athens Convention, the liability limits of
which are much higher than those in the 1996 Protocol, Greek carriers will
opt for global limitation of liability. It may be concluded, therefore, that each
time the limits of liability fail to correspond with each other, it will be to the
detriment of passengers’ interests. In other words, different levels of compen-
sation will exist.
An international maritime carrier may also limit his liability for loss of or
damage to luggage or passengers’ vehicles under Article 8 of the Athens
Convention,45 which defines this liability under three separate categories.
Furthermore, he may invoke the limits defined in Article 6§1 (b) of the
London Convention, which relate to the global limitation of liability for
claims arising from damage to property.46 However, the increase in the limits
prescribed by the 1996 Protocol will give rise to the same issue as that con-
cerning passengers highlighted above.
Finally, another issue concerns the fact that an international maritime car-
rier cannot limit his liability for claims in respect of damage to passengers or
luggage caused by a delay in the carriage, even though such a right is provided
for in Article 2§1 (b) of the London Convention. What is more, the damages
are assessed as a whole, that is, for the entire duration of the carriage for which

44
See Griggs-Williams, op. cit., p. 43. See also Carriage of Passengers and their Luggage by
Sea (United Kingdom Carriers) Order 1998 S. I. No 2917. The U.K. increased limits of liabil-
ity for its own carriers from 46,666 per passenger to 300,000 SDRs per passenger as from
1 January 1999.
45
According to Article 8 of the Athens Convention the liability of the carrier for the loss of
or damage to cabin luggage shall in no case exceed 833 SDRs per passenger, per carriage; lug-
gage which the passenger does not have in his possession, custody or control and valuables shall
in no case exceed 1200 SDRs per passenger, per carriage; and, finally, for the loss or damage to
vehicles including all luggage carried in or on the vehicle shall in no case exceed 3.333 SDRs
per vehicle, per carriage.
46
Pursuant to Article 6§2 of the LLMC 1976 the limits of liability for the loss or damage
are calculated as follows: i) 167,000 SDRs for a ship with a tonnage not exceeding 500 tons; for
a ship with a tonnage in excess thereof the following amount in addition to that mentioned in
(i) for each ton from 501 to 30.000 tons,167 SDRs; for each ton from 30.001 to 70.000 tons,
125 SDRs and for each ton in excess of 70.000 tons, 83 SDRs.
 limitation of liability in maritime transport of passengers 395

the carrier is liable.47 Indeed, this provision is inexpedient for the carrier
because the Athens Convention makes no provision for carriers’ liability for
damage suffered by passengers as a result of their delayed arrival in the port of
destination and the consequent delay in the delivery of their luggage.48

2. Domestic Carriage
In domestic carriage the carrier has contractual and non-contractual liability
in the case of the death of or personal injury to a passenger, in accordance with
the provisions of civil law (Articles 330, 334, 335 ff., 914 ff, applied by anal-
ogy), in which the principle of full compensation for the damage applies
(Articles 297–298 of the Civil Code).49 Therefore, the issue is that the non-
application of the Athens Convention in domestic carriage deprives the car-
rier of the ability to invoke the liability limit for the individual claims of each
passenger. However, he does have the right to limit his liability for the aggre-
gate of all claims arising from the same incident, according to the limits pro-
vided for in the London Convention (Article 7§1).
The carrier also has the right to limit his liability for damage caused to a
passenger by a delay, according to Article 2§1 (b) of the London Convention,
because our national law provides for a similar liability (Article 180 of the
KIND).50 Therefore, in this particular case he may invoke the limits provided
by Article 6§1 (b) of the above Convention.
On the other hand, the carrier cannot invoke the liability limits under the
London Convention for passenger claims relating to damage to luggage caused
by a delay. This is due to Article 187 of the KIND,51 which regulates the car-
rier’s liability for luggage and which refers to the provisions relating to the
carriage of goods; i.e. to the Hague Visby Rules (HVR) which have been in
force in Greece since the mid-1993 and govern the domestic carriage of goods,
regardless of whether a bill of lading has been issued or not.52 The Rules,

47
On the issue of delay see in particular, Kiantou-Pampouki, op. cit., § 91 pp. 406–407.
48
See in detail, Gologina-Economou, op. cit., § 2 p. 148 et seq.
49
For a more detailed analysis of these articles see Georgiades Ast., Law of Obligations.
General Part (4th ed., 2003) § 5 p. 146 (in Greek).
50
See in this respect, Kiantou-Pampouki, op. cit., § 91 p. 409 et seq.
51
For more details about the Hague-Visby Rules (HVR) see Kiantou-Pampouki, A., Maritime
Law, t. 2, 6th ed., 2007, §§ 176 et seq. pp. 287 et seq.
52
See Kiantou-Pampouki, A., The Ratification of the Hague-Visby Rules and the Law of
Chartering (Article 107 et seq. KIND) [1993] EN (Shipping Law Review), 287, 290, Kiantou-
Pampouki, Maritime Law, 2, op. cit., § 112 p. 13 and § 176 p. 288 et seq., Athanassiou L.,
Sea – carrier’s liability to compensate the persons on board in the case of the shipwreck [2003]
NoB 1596, Korotzis J., The maritime carrier liability under the Hague-Visby Rules, 1994,
p. 13, Korotzis J., Maritime Law, t. 2, 2005. See also the decisions: Piraeus Court of Appeal
162/2004 [2004] EN, 32; Piraeus Court of Appeal 284/2004 [2004] Ναυτ.Δικ. (Shipping
Law Review) 260.
396 eleni gologina-economou

however, do not provide for a maritime carrier’s liability for damage caused
by a delay.53
The carrier may, however, invoke global limitation of liability under the
London Convention (Article 6§1 [b]) for passenger claims relating to loss of
or damage to luggage, including that left in a vehicle, just as he has the right
to an individual limitation of liability under the Hague Visby Rules, on which
his liability is based (Articles 3§1 and 4§§1 and 5 of the HVR, applied by
analogy).54,55

3. International and Domestic Cruise

In international cruise liners,56 which in Greece are regulated by Presidential
Decree 339/1996,57 the persons who are liable to cruise passengers can limit
liability “in accordance with the provisions relating to liability in the interna-
tional conventions binding on the country…” (Article 5§ c). It is clear that
this provision implies a limitation of liability under both the Athens and
London Conventions. Consequently, when individual claims are brought by
cruise passengers for damage suffered during a cruise (death or personal injury
or the loss of or damage to luggage), the persons who are liable may invoke the
limits of liability prescribed in Articles 7 and 8 of the Athens Convention.
However, for an aggregate of claims arising from the same incident they
may invoke the limits prescribed in Articles 7 and 6§1(b) of the London
Convention – provided, of course, that the persons who are liable under
Presidential Decree 339/1996 come within the scope of the term “shipowner”
as defined by the London Convention.58
In domestic cruise liners, on the other hand, Article 5§2 (c) of Presidential
Decree 339/1996 cannot be applied in respect of the Athens Convention but

53
More details in Kiantou-Pampouki, Maritime Law, v. 2 op. cit., § 212 p. 487; Gologina-
Economou, Liability in Multimodal Transport. (National-International) 2000, § 11 p. 215
et seq.
54
See Piraeus One Member District Court 5229/2000 [2001] ΠειρΝομολ (Law Review of
Piraeus) 205, 208 or [2001] EΕμπΔ (Commercial Law Review) 310, 312.
55
See Athanassiou, [2003] NoB, op. cit., p. 1597 et seq.; Gologina-Economou, Liability in
Multimodal Transport, op. cit., p. 292 et seq.
56
Gologina-Economou, International Carriage of Passengers and their luggage by Sea,
op. cit., § 1 p. 89 et seq.
57
See, in detail, Korotzis J., The Contract of Cruise, 1999, p. 5 (in Greek).
58
For the meaning of the term “Shipowner” according to Article 1§2 of the LLMC 1976,
see Kiantou-Pampouki, Maritime Law, 1, op. cit., §§ 80 et seq., p. 354 et seq. (in Greek),
Gologina-Economou, Liability to pay Damages for Maritime Claims. The Article 4 of the LLMC
1976 Convention in “Liability to pay Damages under Greek and International Maritime Law”,
4th International Conference on Maritime Law, Piraeus 6th–9th June 2001, I. (Reports,
Piraeus 2001), p. 101 et seq., and [2001] EEμπΔ 353 et seq.
 limitation of liability in maritime transport of passengers 397

only in respect of the London Convention.59 Indeed, the Athens Convention

applies only in the case of international maritime carriage and, by extension,
in the international cruise liner business, as has already been mentioned. In
this case, the vacuum created is covered by the national legislation relating to
domestic carriage, which makes no provision for damage compensation lim-
its; therefore, full compensation for individual claims is provided for by the
provisions of the Civil Code.
A view has been expressed to the effect that the persons liable in a domestic
cruise could limit their liability through an application by analogy of the pro-
visions of the Athens Convention only if the limits prescribed therein were
higher than those prescribed by domestic legislation. The reasoning behind
this opinion is in keeping with the intentions of the Community legislator,
which seeks to provide protection for the consumer, who in this particular
case is the cruise passenger.60 However, this opinion cannot be accepted within
the framework of Greek national legislation.61
In any case, the persons who bear liability for the cruise may, under the
London Convention, limit their liability for the aggregate amount of passen-
ger claims arising on any distinct occasion.
Finally, the individual issues which have been identified above in the areas
of international and domestic carriage also relate to the corresponding forms
of cruise.

V. Conclusions

From the above analysis the following conclusions may be drawn. Greece’s
expected ratification of the 1996 London Protocol, which increases the liabil-
ity limits provided by the 1976 London Convention, has been hailed as a
serious attempt to harmonize Greek law with that of other European states.
However, this attempt should be completed by taking two other steps: increas-
ing the maximum limits of liability under the Athens Convention, and incor-
porating the Convention in Greek national law in order to eliminate the issues
which have been identified. It is worth noting that these steps will also provide
for a uniform system of liability and liability limitation in the international
and domestic carriage of passengers and their luggage, as well as a uniform
system of limitation of liability in the area of cruise activity.

59
See Korotzis, op. cit., p. 142.
60
Korotzis, op. cit., p. 143.
61
Athanassiou [2003] NoB, op. cit., 1603 et seq.
 INDEX
Abuse of dominant position 160, 331
collective dominance 40
discriminatory terms 331
dominant position 331
market share 331
network of correspondents 331
objective procedures 331
strong economic links 331
transparent procedures 330
exclusionary conduct 40
exploitative conduct 40, 41
Access to the market, see cabotage
Agreements, see also tramp services
between carriers and shippers 47
consortium, see Liner consortia
double taxation 279
horizontal 18, 20
information-exchange 30 et seq., 57
information sharing 31, 33
loyalty 19, 20
pooling (see pools)
price fixing (see liner conferences, pools)
rate discussion 31
stabilization 27
technical 18, 57
Aggregation of insurance periods 212
Analir case 193–194
Athens Convention 1974/1976, see
limitation of liability
Block exemption, see liner conferences, Liner
consortia
Blue certificate 346
Brussels package 10
Bulk
dry 80
liquid 80
sectors 80
specialized 72, 80
Cabotage 167 et seq., see also Greek
law 2932/2001
access to the market 202 et seq.
ECJ case law 169 et seq.
island 168 et seq.
mainland 170, 171, 176, 177
manning 171–172
public service contracts 173 et seq., 182
et seq.
public service obligations 173 et seq., 182
et seq.
safeguard measures 172–173
Regulation 3577/92 199 et seq.
impact on national
markets 175–177
State Aids Rules and 181–182
CCT (Council of Coastal Transport) 195,
199, 202
Charterparty 85, 97
Collective dominance, see abuse of dominant
position
Commercially sensitive information 31,
33–35
Common carriers 58–60, 63, 66, 68–69
Commodity 78, 79, 82, 83
Competition Law
competitive process 109, 110
modernization of 178, 179
objectives of 104 et seq.
position in US law 106–108
European case-law 112–113
Social welfare 110, 111
Consortium agreements, see Liner
consortia
Consumer welfare, see welfare
Containerization (of cargo) 46, 54, 66
Cyprus 207, 210
Denmark 221, 222
Dominant position, see abuse
Duty of disclosure 307
Duty of due care 308
Dry bulk sector, see bulk
Employment
conditions of 208, 213
Empty core (theory of ) 47, 48 et seq.
Entitlements 212, 215, 216
Environmental, see also environmental taxes
state aid 229
-ly friendly technologies 229
Equal treatment 208, 211
European Commission against Greece (Case
C-251/04) 170
European Commission Guidelines, see also
Maritime Transport Guidelines
on aid to maritime Transport 219, 220,
226
400
on Environmental State Aid 229
on Regional State Aid 228
Excess loss reinsurance 320
Exclusive rights, see Ports
Exportability of benefits 212
Federal Maritime Commission (United
States) 58, 59, 62, 65–69
Fighting ships 59
Fiscal measures 226 et seq., see also State aid
Flag(s)
flag of a third state 281
flagging-out 219
parallel 338 et seq.
France 213, 214, 215, 221
French Constitutional Council 208
French law 375 et seq.
Free dismissal 343
Free in out clause (FIO) 382, 383
Freedom of contract
under UNCITRAL Convention 353
et seq.
under Hague-Visby Rules 376 et seq.
Geographic market, see market
Germany 221
German Constitutional Court 208
Greek tonage tax system 268
categories of ships 274
establishments of Law 89 283
inactivity of the ship 277
Group General Excess Loss Reinsurance
Contract 322, 328, 330, 333
Guidelines, see European Commission
Guidelines
Hague-Visby Rules 350–352, 354–356,
360, 364, 378
and freedom of contract 276 et seq.
electio fori 378, 380
electio iuris 378, 380
FIO clause 383, 384
paramount clause 380, 381
scope of application 382, 383
Hamburg Rules 352, 364
Horizontal agreements, see agreements
Hub (ports) 244, see also Ports
Hydra Insurance Co. Ltd 321
captive insurer 321
Inactivity of the ship, see Greek tonnage tax
system
Income (tax), see Tax
Independent action (right to) 60
Information exchange agreements, see
Agreements
index
Infrastructure
general 245, 246, 252
projects 247, 260
public 243, 245, 247
user specific 252, 253, 254
Insurance market (capacity of ) 334
Insurance servises, see also Marine insurance
free movement of 315
Insurability of risks 334
Insured interest, see marine insurance
International Group (IG) Agreement 323,
328 et seq.
administrative costs 328
fair and adequate evaluation of cost 330
expert committee 330
external costs 328
Holding Club, the 328, 330
minimum costs for tankers, the 325, 329
New Club, the 328
quotation procedures, the 325, 328
release calls 330
recommendation 329
International Group of P&I Clubs 320
International Group Pooling Agreement
(IGP Agreement) 321 et seq.
accounting practices, the approval of, 326
collective purchase of reinsurance 327
exemption 333
minimum common level of cover 327
overspill liability 322
overspill calls 322
retention 321, 331
reinsurance arrangements 326
International Transport Workers
Federation 346
Joint control 125–126
Joint sales agency 131–134
Joint venture
full-function 123–125
under 81EC 118–120
under Merger Regulation 118–119
under national competition laws 121
Labour
conditions 338
unions 214
Latvia 210, 215–218
Law 2932/2001 (Greece) 187 et seq.,
see also cabotage
coastal transport network 188, 195–198
conditions concerning the shipowner 202
et seq.
language requirements 204
manning 203, 204
public service contracts 200, 202
 index 401

public service obligations 192–195 Mobility rights 211

safety of the vessel 205 Modernisation of EC Competition
rates 198–200 Law 178–179, see also Regulation
vessel specifications 204, 205 1/2003
Lex loci laboris 210
Limitation of liability Netherlands 217, 221
Athens Convention 1974/1976 Norway 217, 218
Individual limitation 388, 393–394 Nuclear insurance pools 335
International cruise 396–397
“per passenger per carriage” 392–393 Ocean Shipping Reform Act (1998),
Protocol of 2000 387, 394 OSRA 44 et seq.
Liner conference(s) 7 et seq., 53 et seq., 88, OECD model tax Convention 279 et seq.
see also Regulation 4056/1986 Overtonnage 43, 45
block exemption 26–27
containerisation and 12 Paramount clause 378, 380–381
liberalisation of trades and 14 Parallel flag(s) 338 et seq.
UN Code of Conduct for 7, 9, 10, 21, EU social law on 339–342
22, 43, 286 national law on 342–345
US Competition Law 44 et seq. Parallel pricing 39
Liner consortia 10, 11, 20, 28, 37 et seq. Pecuniary loss liability insurance 335
block exemption 38 Perfect contract (theory of ) 293 et seq.
object 54–55 Permanent establishment principle 280
Liner pool(s) 58 “post-box” permanent establishments 280
Liquid bulk sector, see bulk P&I club(s) 318 et seq.
LLMC 1976 322 advance calls 318
delay in the carriage 394, 396 bankruptcy 319
“distinct occasion” 392, 397 body corporate 319
domestic cruise 397 excess losses 319, 320
global limitation 388, 392–396 indemnity 319
LLMC PROT 1996 387, 393, 394, 397 mutual non-profit-making entities 318
London Group 320 mutual insurance 318
overspill calls 322
Manning agency 210 premium 318, 334
Manning 171–172, see also cabotage supplementary calls 318
Marine Insurance Protection and indemnity (P&I)
insured interest 304, 305 insurance 317
product 301 et seq. Poland 210
regulation of 303–304 Pool(s), see liner pool(s), tramp pool(s)
scope of cover 305–307 Port(s)
exclusions 305 competition 254
perils 305 inter-port competition 243, 244
valuation 304, 305 intra-port competition 243, 244
Maritime labour 207 et seq. authorities 244
Maritime Transport Guidelines 27, 29, 53 dues 246
et seq., 81, 87, 101, 102, 229 exclusive rights 249
Market financing 247
competitive conditions 246 economic advantage 248, 252
concentrated 36 selectivity 251
economy 254 tranfer of state resourses 247
relevant, see tramp services proportionality 251
structure 36 privatisation 153 et seq.
Market Economy Investor principle Price fixing agreements, see agreements
255 et seq. Privatization, see ports
Measures, see fiscal measures Public-Private partnerships 260
Merger Regulation 118–120 Public service contracts, see cabotage
Micro-economic theory 293 Public service obligations, see cabotage
402 index

RAMC (Regulatory Authority for Maritime ineligible maritime activities 234–236

Cabotage) 194 et seq. refund of social security
Rate discussion agreements, see agreements contributions 241
Rates 194 et seq., see also Law 2932/2001 guidelines for state aid to ports 261–263
Registers (second, international) 208, 215, notification of 258
342, 343 (operating) aid 225
Regulation 1408/71 207 et seq. Stabilization agreements, see agreements
Regulation 4056/1986 10, 19, 50 et seq., Sunk costs (in maritime trade) 43, 49
71, 74–75, 177, see also liner conference
block exemption Tanker risks
Regulation 3577/1992 185 et seq., see also catastrophic nature 330
cabotage Tariff agreements, see agreements
Regulation 823/2000 54, 61 Tax(es), see also income tax, tonnage tax
Regulation 1/2003 53, 73, 75, 179 business 265
Regulation 1419/2006 14–18, 21–23, 54, corporate 266 et seq.
71, 92–93 environmental 228, 229
Relevant market exemption 227, 228, 272 et seq.
tramp services 80 et seq. income 226, 236–239, 241, 272
demand substitution 82–84 treaties 279 et seq.
geographic market 85–86 reduction 227–229
supply substitution 84–85 zero 286
Ring-fencing 233 Technical agreements, see agreements
Tonnage tax 232, 234, 235, 265 et seq.
Safeguard measures 172–173, see also all or nothing option 239
cabotage calculation 274
Sea-employers/Sea workers 342 Dutch model, the 277
Sea ports, see Ports Tramp pools
Seamen/seafarers 212 et seq. agreement 87, 97, 98, 121–123
Ship management 226, 231, 232, assesment 90–93, 100–103
239, 240 market power 90–91
Shipping Board (United States) 58 benefits 91–92
Social 207 et seq., 337 et seq. indispensability of restrictions 92
action 214 commercial background 95, 96
charges 221 contractual terms 100
insurance contributions 221 distribution of profits 98
partners 208 full-function 123–125, see also joint
protection of maritime labour 207 venture
security systems commercial independence 130
coordination of 209, 210, 212, independent resources 126–127
214, 222 lasting basis 134–135
SOLAS Convention 171 managerial structure
Specialized bulk sector, see bulk administration controlled 99
Spot market 78 agency pools 99–100
STCW Convention 171 member-controlled pools 99
State aid 226 et seq., 181, 285 Tramp services
Altmark case 183 comparison with liner 88
authorization of 259 barriers to entry 77
compatible 258, 261 definition under regulation 405672
employment, for shipping 240–241 et seq.
environmental, see environmental dependence on trade patterns 78
fiscal state aid 225, 226 features of 76 et seq.
conditions 231–232 homogeneity 76–77
deduction of social security relevant market 75 et seq.
contributions 238–239 transparency 77
guidelines on, to maritime transport contracts 85
transport 229 et seq. Transparency of information 267
 index
UNCITRAL (Draft) Convention
347–365
arbitration 372
Art.1(2) 357
Art.79 356–357, 365
Art.80 357, 363, 365
Art.80(1–4, 6) 358, 365
Art.80(5) 359, 365
carrier liability 354–355
basis of liability 368–370
mandatory nature of 349, 351–353,
356–358, 360–364
scope of liability 370–372
freedom of contract 353, 355–357, 360,
362–364
jurisdiction 372
legal action (time for) 373–374
procedural rules 372–373
scope of application 354
shipper liability 355
volume contract, see volume contract
403
Undertaking 323, 333
accumulation of reserves 323
pursuit of profit, the 323
United Kingdom 115, 117, 221
United Nations Code of Conduct, see Liner
Conferences
U.S. Ocean Shipping Reform Act 44,
60–61, 63 et seq.
U.S. Shipping Act (1916) 59
U.S. Shipping Act (1984) 59, 68
Volume contract 351, 353, 365, 366,
368, 374
contractual derogations 357–359
definition 357
equal bargaining power 360–361
unequal bargaining power 363
Welfare
consumer 40
social 110–112