Logistics July 2013 LOGISTICS BULLETIN

Welcome to the July edition of our Logistics Bulletin.

We begin this edition by reviewing two recent logistics cases. The US District Court recently confirmed that the US Carriage of Goods by Sea Act 1936 clearly applied to limit the sub-contracting domestic carrier’s liability and we look at how Himalaya Clauses in multimodal bills of lading protect subcontractors for the land leg of the transport. We then turn to a recent decision of the Federal Supreme Court of Germany, which confirmed the view taken by the English Court that, for the purpose of Article 2 CMR, the Hague Rules apply to the sea leg of a multimodal transport, limiting the road haulier’s liability for that leg.

The carriage of dangerous goods by air gives rise to both potential civil and criminal exposure for all parties involved in the cargo chain, including shippers, freight forwarders and air carriers. We analyse the types of liability which might arise from carriage of dangerous goods by air and how cargo interests may seek to mitigate against such risks.

Liquidated damages clauses can be commercially useful, but must be carefully drafted in order to avoid falling foul of the English law rule against penalties. In a recent decision, the English High Court applied a more modern approach to analysing contractual wording and we examine the potential impact on liquidated damages clauses in logistics .

Finally, we put the spotlight on competition and look at the latest competition issues in the logistics sector, including mergers, acquisitions and antitrust investigations.

Justin Reynolds, Partner, [email protected] Craig Neame, Partner, [email protected] Himalaya Clauses in motor carrier, Service Transfer Inc The Court held strongly that Carmack multimodal transport: (STI), for the carriage of goods by road did not apply in this case, for two implications of a US District from Erlanger to the port of Norfolk, reasons: Court’s decision in Royal & Virginia. There was an accident during this stage of the journey, which First, Carmack does not apply to Sun Alliance Insurance plc v non-receiving carriers transporting Service Transfer Inc resulted in a total loss of the goods. Baxter’s subrogated insurer, Royal goods as part of transhipment A recent decision granting partial & Sun Alliance Insurance (RSA), between the US and non-adjacent summary judgment in the US District claimed against STI for the loss, who foreign countries. This is because 2 Court (Southern District of New York) in turn, applied for partial summary STI did not fulfil the two-part test for has confirmed that the US Carriage judgment that it was entitled to rely liability under Carmack, that: of Goods by Sea Act 1936 (COGSA) on the limitations in liability conferred (a) The carrier must provide can be contractually extended to limit by COGSA, and, in particular, on the transportation or service subject to a sub-contracting domestic carrier’s Himalaya Clause present in the bill of the jurisdiction of the US Surface liability. The decision provides a useful lading, and the Clause Paramount, Transportation Board (STB); and, illustration of the US courts’ current which expressly extended COGSA’s approach to interpreting contracts for application to the inland proportion of (b) The carrier must “receive” the the multimodal international carriage the shipment. goods for transportation under the of goods. STB’s jurisdiction over domestic STI argued that, in claiming directly motor transport. against it, RSA were disregarding Himalaya Clauses the bill of lading and umbrella service Second, RSA’s further argument, that Because sub-contracting is central by pursuing a direct, there was a de facto domestic bill of to multimodal transport, multimodal unlimited liability action against them lading between STI and Baxter under transport operators (MTOs) typically as subcontractor, which was not which STI were liable under Carmack, contract to protect their subcontractors permitted under COGSA. RSA argued against claims in tort from shippers. instead that the Carmack Amendment1 One of the most common ways of – and not COGSA – applied in this doing this is by including in bills of instance. Carmack imposes liability lading a “Himalaya Clause”, which against certain carriers for damage permits the subcontractor to rely caused during the carriage of goods on the exclusions, limitations and by road. RSA argued that Carmack defences in the MTO’s bill of lading applied to the relationship between STI despite the subcontractor not being a and Baxter and thus they were liable party to the bill. for the loss.

Royal & Sun Alliance Insurance plc v Service Transfer Inc (4 Dec 2012, US District Court, Southern District of New York) Here, the shipper, Baxter Healthcare The case illustrates how Himalaya Clauses as Corporation (Baxter), entered into a incorporated into multimodal bills of lading can help multimodal (land, sea, then land) bill of lading with the MTO, American to protect subcontractors for the land portion of the President Lines Ltd (APL), for the transport and the difficulties of holding subcontractors shipment of a cargo of human plasma by road and sea from Erlanger, liable under domestic regulations such as Carmack. Kentucky to Vienna, Austria. APL then CRAIG NEAME subcontracted with the defendant 1 46 U.S.C. §14706 2 From the US Supreme Court’s decision in Kawasaki Kisen Kaisha Ltd v Regal-Beloit Corporation 130 S Ct 2433, 2439 (2010)

02 Logistics Bulletin also failed. This was because the bill CMR v Hague Rules - which despite the damage and loss taking of lading itself was not domestic, and applies when and why? place during the sea leg of the expressly stated carriage of goods all transport. The road carrier sought to the way to Vienna. Even if there were rely on the exception found in Art. 2 of Summary of “UND ADRYATIK” to be a second domestic bill, this CMR, meaning that it was the Hague BGH, Judgment of 15 December would be invalid under US law unless Rules that applied. 2011 - I ZR 12/11 - OLG München additional consideration had been received for it in addition to that which In summary, Art 2 sets out the Introduction was paid under the main bill of lading. broad proposition that if the cargo remains on board the road vehicle Both parties acknowledged there had Difficulties can arise when trying to during carriage by some other mode, not been additional consideration. determine whether the Convention on e.g. during a Ro-Ro sea crossing, the Contract for International Carriage RSA’s defence therefore failed and STI then CMR will generally apply. The of Goods by Road (CMR) or the Hague/ were granted summary judgment for exception, also found in Art 2, states Hague Visby Rules determine the road non-liability. The case illustrates how that if it is established that the loss or carriers’ liability where goods are lost Himalaya Clauses as incorporated damage was not caused by the road or damaged during the sea leg of an into multimodal bills of lading can carrier and the loss or damage was international multimodal transport. help to protect subcontractors for the attributable to some event which could land portion of the transport and the The Federal Supreme Court of Germany only have occurred in the course of difficulties of holding subcontractors recently decided in the case of Und and by reason of carriage by the other liable under domestic regulations such Adriyatik that, when the requirements mode, then CMR is ousted in favour as Carmack. of Article 2 CMR are fulfilled, it is the of any other “conditions prescribed by Hague/Hague Visby Rules and not law.” It is important to note that CMR For further information, please contact CMR that governs the road carriers’ will still apply even if the exception is Craig Neame, Partner, on liability during the sea leg. The English met, if there are no other “conditions +44 (0)20 7264 8338 or Court reached a similar decison some prescribed by law.” [email protected], or time ago in Thermo Engineers Ltd and Matthew Wilmshurst, Associate, others v Ferrymaster Ltd3. Federal Supreme Court Judgment on +44 (0)20 7264 8115 or [email protected], The First Instance and the Appeal Facts of the Und Adryatik or your usual HFW contact. Court found in the Claimant’s favour, Research by Otto Rich, Trainee. The contract of carriage involved the stating that CMR also applied to the transportation of goods from Turkey to sea leg of the voyage and not the the UK and Spain. Hague Rules. The case was appealed once more, and it was left to the Initially, using two trucks, the goods Supreme Court to consider and were transported to the Turkish port interpret what amounted to “conditions Pendik, where the trucks carrying the prescribed by law” for the purposes of goods were stowed on board the “Und Art. 2 CMR. Adryatik”. A fire broke out on board during the sea passage from Trieste, This question posed numerous Italy, which destroyed the vessel and difficulties with no straightforward the cargo. The cause of the fire was answer. The Supreme Court never established, but serious doubts reviewed the history of Art. 2 CMR were raised at the time regarding the and considered how other Member effectiveness and operation of the fire States had tackled the question. It fighting system on board. considered the meaning of the French interpretation, the Dutch interpretation The Claimant alleged that the in Hoge Raad der Nederlande and the applicable liability regime was CMR, English approach in Thermo Engineers Ltd and others v Ferrymaster Ltd, in 3 Thermo Engineers Ltd and others v Ferrymaster trying to answer the question. Ltd and other [1981] 1 All ER

Logistics Bulletin 03 The Supreme Court noted that concluded that the sinking of a ship, Thermo Engineers Ltd and others v “Piggy-back transports”, where cargo vessel collisions, groundings, cargo Ferrymaster Ltd and others [1981] remains on board the road vehicle damage from sea water ingress or 1 All ER which is itself loaded onto another the movement of the vessel in rough mode of transport, can leave the road sea were evidently risks inherent in The English High Court considered a carrier unprotected, as the Hague/ the carriage of goods by sea. Fire on case where a trailer containing cargo Hague Visby Rules, applicable to the the other hand was as such not an suffered severe damage during loading contract of affreightment between the incident typical for the carriage by sea. operations. The loading road haulier and the vessel, provide for Nevertheless, it was concluded that a the cargo were familiar with the vessel different defences and limitations. fire of the magnitude experienced by and should therefore have noticed the “Und Adriyatik” was typical for the that because the cargo exceeded the The purpose of Art. 2 CMR was carriage by sea. The justification was trailer height, it could not be stowed on therefore, the Supreme Court that the lack of escape and greater the vessel. The question was thus not concluded, to ensure that the recourse difficulty of bringing a fire under control whether the defendant, who employed action the road carrier has against, for at sea, means the risk fire presents at the stevedores, was liable for the said example, the vessel mirrors the liability sea is substantially different to the one damage, but if the defendant’s liability the road haulier has vis-à-vis its own it poses on land, making it a risk typical was to be determined by the Hague client. for the carriage by sea. Rules or CMR. It was held that CMR did not apply and that the liability fell Looking at the history of CMR the Moreover, the Supreme Court stated within the exception provided for within Supreme Court took into consideration that the liability was to be determined Art. 2 CMR. The court’s reasoning that at the time CMR was drafted, based on a fictitious contract that was that CMR was supposed to be other international transport would have existed, had the seller/ consistent with other international conventions for the transport by air, shipper of the cargo entered directly conventions, such as the Hague Rules. by train and by sea already existed. It into a contract with the carrier of the was assumed by the Supreme Court other mode of transport. Implying a that the Member States recognised fictitious contract meant that for the the different dangers associated sea leg of the transport the Hague with the different modes of transport Rules were to apply, as these would and that consequently, under certain have been the regime mandatorily circumstances, it made more sense applicable, i.e. “prescribed by law” to for these other international transport such a contract had it been entered conventions to apply. As such, in the into and accordingly the road carrier’s Dutch case, Hoge Raad, the court liability fell to be determined by the concluded that “conditions prescribed Hague Rules and not CMR. by law” referred to international transport conventions. A similar conclusion was also reached by the English High Court in Ferrymaster Ltd.

The Supreme Court consequently concluded, that (i) the CMR rules would not apply in cases where the damage/loss was caused by an “The rulings in Und Adriyatik and Thermo Engineers incident typical for that other mode of Ltd and others v Ferrymaster Ltd create a certain transport and, (ii) as long as the road haulier was not responsible by way degree of certainty, but in every case where a loss has of action or omission for the incident a occurred during a multimodal transport operation, occurring. to which CMR appears to apply, a careful analysis When considering what amounted to a ‘typical incident for the carriage must be undertaken to establish the position.” by sea’, the Supreme Court JUSTIN REYNOLDS

04 Logistics Bulletin “For the purpose of Art. 2(1) when course a pre-requisite for the Hague/ We discuss below the regulation of the a road vehicle was loaded onto a Hague Visby Rules to come into play. carriage of dangerous goods, the types ship [...]the point where carriage by If a bill of lading had not been issued of liability which might arise from the road ceased and carriage by sea (which for most short sea crossings is carriage of such goods and how cargo commenced was [...]to be determined the norm), it is likely that CMR would interests may seek to mitigate against by the Hague Rules.”4 Consequently then apply as there could be no other such risks. and in accordance with the provisions “conditions prescribed by law.” of the Hague Rules, the carriage by Regulation sea was under way, as the damage Conclusion International regulation of the carriage arose during cargo loading operations The rulings in Und Adriyatik and Thermo of dangerous goods by air largely and thus the applicable cargo regime Engineers Ltd and others v Ferrymaster stems from rules laid down by the was by extension the Hague Rules. Ltd create a certain degree of certainty, International Civil Aviation Organisation but in every case where a loss has a When considering if the damage was (ICAO), a UN agency, set out in occurred during a multimodal transport caused by an “event which could Annex 18 to the Chicago Convention operation, to which CMR appears only have occurred in the course of 1944. The rules cover, at a high 5 to apply, a careful analysis must be and by the other means of transport” level, matters such as permitted/ undertaken to establish the position. the court concluded that the correct forbidden dangerous goods, packing Art 2 CMR is an awkwardly worded question one should ask is not requirements, labels and markings, provision and in many cases it is not an “whether the damage could only have and the responsibilities of shippers and easy analysis to make. occurred in the course of the other aircraft operators. They also require means of transport, but whether the For further information, please compliance with separate and detailed event causing the damage could only contact Justin Reynolds, Partner, ICAO technical instructions on the have occurred in the course of the on +44 (0)20 7264 8470 or carriage of dangerous goods. 6 other means of transport.” The court [email protected], or your The Annex, of itself, does not create therefore found that the Hague Rules usual HFW contact. Research by must apply, as that particular stowage binding obligations on cargo interests. Meike Ziegler, Trainee. damage could have only occurred in Instead, contracting states to the 1944 the course of and by reason of the Convention (which includes virtually all transport by sea. of the world’s countries) are required Carriage of dangerous goods to implement, within their own Furthermore, the court ruled that the by air: liability issues for cargo domestic legislation, laws which give liability for the damage caused by the interests effect to the requirements of the Annex stevedores was to be determined and which ensure compliance with the The carriage of dangerous goods by as if the claimant had entered into a technical instructions. separate contract with the carrier for air gives rise to potentially significant the carriage by sea. Consequently, the exposures, both civil and criminal, for However, whilst this might suggest CMR rules would not apply to such a all parties involved in the cargo chain, that a standardised level of regulation contract, but the Hague Rules would including shippers, freight forwarders should be present at an international and the court thus concluded that any and air carriers. Such exposures have level, the reality is that, owing to the liability caused during the sea leg of the increased in recent years as the boom manner of implementation of Annex transport was to be determined by the in e-commerce has resulted in ever- 18 being largely left to individual Hague Rules. This begs the question, increasing numbers of people buying states, levels of regulation, sanctions from an English law perspective, as and selling (and shipping) goods and enforcement can vary between to what would have happened had internationally. different jurisdictions. As such, cargo a bill of lading (or similar document interests must be aware of, and of title) not been issued, which is of comply with, all such regulations which might apply to their activities. 4 Thermo Engineers Ltd and others v Ferrymaster Ltd and others [1981] 1 All ER, 1143, b 5 Thermo Engineers Ltd and others v Ferrymaster Ltd and others [1981] 1 All ER, 1143, d/e 6 Thermo Engineers Ltd and others v Ferrymaster Ltd and others [1981] 1 All ER, 1143, d/e

Logistics Bulletin 05 By way of example, in the UK, the Types of Liability ii) Civil Liabilities carriage of dangerous goods is subject to strict regulation. The UK’s The main types of liability arising from The carriage of dangerous goods Civil Aviation Authority carries out the carriage by air of dangerous goods by air can result in various types regular inspections (e.g. at freight are as follows: of damage, all of which could sheds/warehouses, on ramp or at potentially lead to significant i) Criminal Liability the terminal) to check for compliance civil exposures for aircraft with the requirements of the ICAO In many jurisdictions, breaches of operators, freight forwarders and/ technical instructions. Audit style dangerous goods regulations can or shippers. Such damage might inspections are also performed on give rise to criminal liability. In the include, for example: operators and their handling agents UK, for example, it is an offence n Damage to the aircraft. to assess the adequacy of their if a person delivers, causes to be procedures and training. Statistics delivered, takes onboard or causes n Damage to the offending cargo or on such audits in 2012 found, for to be taken onboard an aircraft to other cargo. example, that 63 operators and 23 any goods which he knows or n handling agents had training related ought to have known or suspected Injury to/death of persons on the issues, whilst 15 operators and 13 of posing a risk to health, safety, aircraft. handling agents were using out-of-date property or the environment when n Injury to/death of persons on the instructions/guidance. A system of carried by air, unless that person ground. approvals is also in place for UK and has complied with applicable foreign-registered operators carrying technical instructions and the n Damage to property on the ground. dangerous goods within the UK. packaging is suitable for carriage by air. Penalties will typically be in n Consequential/business type losses Aside from Annex 18, the International the form of (potentially unlimited) (e.g. losses arising from an aircraft Air Transport Association (IATA), the fines, but custodial sentences being grounded). principal trade association of the are also possible for individuals. airline industry, also publishes its Experience in the UK is that fines own Dangerous Goods Regulations. can be significant – running into These contain all of the requirements many thousands of pounds – even of the ICAO Technical Instructions for defendants who are not at the and, in some instances, impose more forefront of the cargo supply chain. restrictive requirements arising from operational considerations. The IATA Other criminal exposures may regulations are applicable to all IATA also exist. For example, failures in member airlines, as well as shippers the handling of dangerous goods and agents that offer consignments of which result in passenger deaths dangerous goods to such airlines. could potentially give rise to exposures to corporate or individual manslaughter/homicide type charges.

“...it is an offence if a person delivers, causes to be delivered, takes onboard or causes to be taken onboard an aircraft any goods which he knows or ought to have known or suspected of posing a risk to health, safety, property or the environment when carried by air...” MARK WATERS

06 Logistics Bulletin The scale of damage can be extreme. n Ensuring/maintaining awareness Liquidated damages in Examples exist of mis-packaged/mis- of, and compliance with, all logistics agreements – an declared dangerous goods causing applicable dangerous goods overview catastrophic accidents. In 1996, for regulations (including the Annex 18 example, a Valujet DC9 crashed in requirements as implemented in all “Normal” damages the Florida Everglades as a result of relevant contracting states and any a fire caused by loosely packaged applicable IATA regulations). When a tort, breach of contract chemical oxygen generators, killing or breach of a statutory duty is n all 105 passengers and 5 crew on Provision of comprehensive training committed, damages are awarded board. More recently, lithium batteries on the handling, packaging, to compensate the claimant for the have grabbed the headlines, being inspection etc of dangerous loss or damage suffered as a result implicated in a number of accidents goods to all individuals involved of such tort or breach. The purpose (including the loss of a Boeing 747 in in such activities, and repeating of damages is to return the claimant, 2010), leading to revised regulations on and updating such training as so far as money can, to the position their safe transport. necessary (e.g. to reflect changes he occupied/would have occupied to applicable rules). had the tort or the breach not been Of course, where liability for such n committed. The prime example of losses ultimately falls is very heavily Implementation and operation of suitable quality systems and record damages which may become payable dependent on a number of factors, in the context of logistics services are including the established cause(s) keeping to monitor compliance with dangerous goods procedures damages payable for loss or damage of the loss, the applicable liability to cargo. regime(s), the actions/omissions (to include incident reporting and of the various involved parties and response). Liquidated damages any arrangements (e.g. contracts) n Consideration of the terms and between the parties which might affect conditions of contracts in place with Liquidated damages are different the apportionment of liability. Cargo other parties in the freight chain, from “normal” damages. They are interests should, however, be aware and how such provisions might be specific amounts which the parties to of the exposures they potentially face, used to apportion or transfer liability a contract have agreed will be payable which might arise if they are found to between such parties. in the event of non-performance have played a part in mis-declared of certain contractual obligations. or mis-packaged dangerous goods n Consideration of whether liability The trigger point for payment of finding their way onto an aircraft, insurance carried is adequate liquidated damages is often delay for example, through failures in their (both in terms of scope and level of in delivery or delay in completion. internal procedures or checks. cover) to protect against potential Liquidated damages are widely used in civil liabilities which might arise from construction agreements, but they are Mitigation the handling of dangerous goods. not so common in contract logistics where key performance indicators and For further information, please contact In view of the potential exposures service credits are more prevalent, Mark Waters, Associate, on identified above, cargo interests should although we have seen an increase in +44 (0)20 7264 8275 or take steps, as far as possible, to avoid the use of liquidated damages in recent [email protected], or your usual contraventions of dangerous goods years. They are however found in the HFW contact. regulations and protect themselves logistics and liner shipping industry, but against the consequences of such under different name tags. Demurrage, breaches. Whilst it is of course very i.e. the daily rate payable for delay to difficult to screen every item of cargo a vessel beyond the agreed laytime, sent by air (particularly given that is an example of liquidated damages. we live in an age where anyone can Demurrage may also be payable for effectively be a “shipper”), there are a storage of (full) containers on quay number of steps that cargo interests beyond the agreed free time. Detention should be taking, including: is often payable on (empty) containers which are returned late to the carrier.

Logistics Bulletin 07 Enforceability of liquidated Liquidated damages clauses and If the liquidated damages clause is damages clauses international conventions deemed a penalty, then the clause will be set aside, and the claimant will be In order for a liquidated damages When using liquidated damages in entitled to recover “normal” damages clause to be enforceable under English the context of agreements to which in the ordinary way (and subject to any law, the sum specified as payable any of the international transport limitation and which needs to be a genuine pre-estimate of conventions apply compulsorily, careful may be contained in the agreement). the loss which would probably arise drafting should be used to ensure from a breach of the contract. If the the liquidated damages clause does Unfair Contract Terms Act 1977 sum is totally out of proportion with the not contravene any of the convention (UCTA) losses likely to be suffered, then the provisions which are mandatory liquidated damages will constitute a and prevent contracting out. If the As we saw in the previous edition of penalty and not be recoverable. liquidated damages clause imposes this Bulletin (Jan 2013): Limitation The onus of proving that the sum greater or additional liability and it does clauses: a quick reminder of how payable is a penalty is on the party so in a manner that is not allowed they work, UCTA provides that where liable for such sum. under the applicable convention, a party seeks to rely on a clause then such clause may be open to that limits or excludes its liability for In a recent case, Cavendish Square legal challenge even if the liquidated , it can only do so provided Holdings BV and another v El Makdessi damages are a genuine pre-estimate of the clause is “reasonable” (Section 2(2) (2012), the High Court applied the the loss. of UCTA). UCTA will apply to a clause more modern approach to penalties, which limits the amount recoverable which no longer involves just looking at Sole remedy? in the event of negligence, but there whether the sum payable is a genuine seems to be some debate over pre-estimate of loss, but looking at the If the liquidated damages clause is whether UCTA applies to liquidated commercial justification for the clause. enforceable, the sum stipulated will be damages clauses (in non-consumer Burton J. listed what he considered payable without requiring proof of the contracts). are the relevant questions when actual damage and regardless of the determining whether or not a liquidated actual damage suffered. This will be damages clause is penal. These the case even if the stipulated sum is questions are: greater than the actual damage. Where the sum payable under the liquidated i) Was there a commercial damages clause is less than the actual justification? damage, the position is the same, and ii) Was the provision extravagant or the sum payable will be limited to the oppressive? amount stipulated in the liquidated damages clause. iii) Was the predominant purpose of the provision to deter breach? iv) If relevant, was the provision negotiated on a level playing field?

The above are all relevant factors when deciding whether or not a liquidated “When using liquidated damages in the context of damages clause will be deemed a agreements to which any of the international transport penalty and should therefore be borne in mind when drafting such provisions. conventions apply compulsorily, careful drafting should be used to ensure the liquidated damages clause does not contravene any of the convention provisions which are mandatory and prevent contracting out.” CATHERINE EMSELLEM-ROPE

08 Logistics Bulletin The general view is that if the liquidated should always be mindful of the in 2010 by the German tax advisor damages clause is enforceable, then it English law rule against penalties, as Anchor Steuerberatungsgesellschaft, probably will not be subject to UCTA. falling foul of such a rule could result in but was later abandoned following a the liquidated damages clause being Commission investigation. Similarly, Key performance indicators set aside. following the results of this investigation – bonus malus/service debit into the European Minibulk/Container For further information, please contact schemes Feeder scheme, and discussions Catherine Emsellem-Rope, between the companies and the Service Level Agreements (SLA) are Senior Associate, on Commission, the cooperatives agreed often used in logistics agreements; +44 (0)20 7264 8279 or to abandon this proposal as well as they are formal negotiated agreements [email protected], an information exchange scheme between the shipper and its logistics or your usual HFW contact. Research which, according to the Commission provider that sit underneath the by Matthieu Moss, Trainee. “could have enabled the coordination logistics contract. The SLA specifies in of rates between competitors”. measurable terms – Key Performance This latter scheme was designed Indicators (KPIs) – the standards to Spotlight on competition – to provide recommendations of be attained in the execution of the mergers, acquisitions and charter rates to shipowners based services and the consequences that antitrust on data collected about the owners’ occur in the event the standards are own rates. Such a scheme and the not met. European Minibulk/Container potential of rate-coordination could have led to increases in charter rates. One such consequence may be the Feeder Investigation No formal proceedings were initiated payment by the logistics provider of a After an investigation lasting just since the Commission felt that market “malus” or “service debit”; these are over a year, on 31 January 2013 the competition had been maintained. sums which become payable when the EU Commission closed an antitrust service standard falls below what the investigation into the cooperation Unifeeder/Feederlink Merger parties have agreed is an acceptable schemes of two large European cleared by OFT level of performance for the service shipowners. European Minibulk and in question. If the sum payable goes Container Feeder, both established On 27 November 2012, the OFT beyond what would be a reasonable in Germany, had planned to jointly cleared the acquisition of Feederlink pre-estimate of the loss, it will be coordinate certain operations of their Shipping and Trading by Unifeeder. deemed a penalty and therefore not container feeder vessels, including the Unifeeder, headquartered in Aarhus, is enforceable. Conversely, if the sum is joint purchasing of fuel. Feeder vessels one of the leading feeder-operators in set at a level which is obviously much are usually used to collect containers Northern Europe with a fleet of around lower than the likely losses, the parties from large terminals to smaller regional 40 chartered vessels, and transport should consider what the nature of ports, often operating on a fixed containers from large European such a payment is and whether it is route. One particular element of the container terminals to numerous intended to operate as a liquidated proposed coordination, namely a regional ports. It also operates in damages clause. system whereby owners would be the shortsea sector, combining sea, compensated for laid-up vessels, Conclusion rail and road logistics to transport would encourage the withdrawal of containers. Feederlink, headquartered There are different ways of dealing with capacity from the market and thereby in Rotterdam, operates on a smaller damages when drafting a contract. push up charter rates for the types of scale with four vessels, transporting Liquidated damages can be a useful vessels concerned. The Commission containers from Felixstowe and tool as they can avoid protracted and investigated whether this system Rotterdam to a handful of UK ports. commercially damaging disputes about was compatible with EU antitrust The merger promises to achieve the damages payable in the event of a law, and in particular Article 101 “operational synergies” between the breach. They also bring certainty and of the Treaty on the Functioning of two companies, resulting in more act as a cap on liability, so from the the EU (TFEU), which prohibits anti- efficient operations in the feeder and point of view of those insuring the risk, competitive agreements. A similar shortsea market. they can be an attractive proposition. scheme known as the Baltic Max However, the parties to the contract Feeder scheme had been proposed

Logistics Bulletin 09 In the Competitive Analysis in their countries there are only three main report and following their guidelines to integrators from which the consumer assess whether there is a “substantial can choose. Therefore, the acquisition lessening of competition”, the OFT of one of these by another (e.g. TNT considered whether the reduction in Express by UPS) would limit this choice competing feeder operators in the further, down to only two options. relevant market was anti-competitive. The existence of BG Freight, a third In general terms, any “concentration”, operator in the market, and the fact as defined in the EU Merger Regulation that it is seen by third parties as a (No. 139/2004), which has an “EU viable alternative to Feederlink and dimension”, must be notified to the Unifeeder, meant that a significant Commission for approval before its constraint on the merged entity would implementation. During this approval exist. In other words, the OFT took process, it is decided in an initial the view that although the two parties investigation whether the acquisition do “represent a competitive constraint should be cleared or whether an “In its press releases on one another” (one of the factors in-depth investigation (known as in determining whether an anti- Phase II) should be opened. The issued on the adoption competitive merger exists), the fact concentration will subsequently either of the decision, the that there were other constraints on be cleared or prohibited depending them (including road and rail services), on the Commission’s assessment Commission stated as well as the fact that there is a low of whether it is compatible with the that they found that barrier to entry to the feeder market, internal market. Under the EU Merger meant that customers will not be Regulation, such an assessment must the markets for the harmed as a result of the merger. As take into account, inter alia, the need express delivery services such, the OFT found that there was to maintain and develop effective no realistic prospect of a substantial competition within the common provided by the four main lessening of competition in any market market and the market position of integrators in Europe, in the UK as a result of the merger. the undertakings concerned and their economic and financial power. namely UPS, TNT Express, In essence, and as laid out in the UPS abandons acquisition of TNT Merger Regulation, a concentration DHL and FedEx, are Express which was subsequently which would significantly impede prohibited by EU Commission national in scope, and effective competition in the common In anticipation of an EU Commission market or in a substantial part of it, in that these integrators only decision to prohibit the deal, UPS particular as a result of the creation or faced limited competition abandoned its proposed acquisition strengthening of a dominant position, of TNT Express. In its press releases shall be declared incompatible with the from local and national issued on the adoption of the common market. delivery companies due decision, the Commission stated that Analysing the direct impact to the they found that the markets for the to their lack of established consumer of a UPS-TNT Express express delivery services provided by merger in a Phase II investigation, the air networks.” the four main integrators in Europe, Commission found that prices for the namely UPS, TNT Express, DHL and ELIZA PETRITSI relevant delivery services would likely FedEx, are national in scope, and that increase across much of the EU, and these integrators only faced limited that any benefits of the merger claimed competition from local and national by UPS would be outweighed by the delivery companies due to their lack of negative impact the consumer. established air networks. In addition, the Commission found that in several EU countries, FedEx is not a significant competitor, which means that in these

10 Logistics Bulletin Although UPS had proposed some Conferences & Events alterations to the acquisition, including the divesting of TNT Express’s subsidiaries in the 15 countries Multimodal Part 2 Seminar identified by the Commission to be HFW London most affected by the proposed merger, (24 September 2013) the Commission did not see these Presenting: Craig Neame, Daniel Martin, Justin Reynolds, as suitable remedies to their Catherine Emsellem-Rope, Matthew Wilmshurst competition concerns.

As part of the Offer Conditions, UPS had agreed to pay TNT Express a €200m termination fee if EU Commission competition clearance was not acquired.

This case can be treated as especially significant since it adds to a small group of notified mergers which have not been cleared. Only very rarely are mergers found to pose competition issues significant enough to be prohibited. In the period between 21 September 1990 and 7 March 2013, over 5000 merger notifications were made to the Commission, with only 24 of these being prohibited. Since 2008 there have only been 4 such prohibitions, including Ryanair’s proposed takeover of Aer Lingus.

For further information, please contact Eliza Petritsi, Partner, on +44 (0)20 7264 8772 or [email protected], or your usual HFW contact. Research by Andrew Spyrou, Trainee.

Logistics Bulletin 11 Lawyers for international commerce

HOLMAN FENWICK WILLAN LLP Friary Court, 65 Crutched Friars London EC3N 2AE T: +44 (0)20 7264 8000 F: +44 (0)20 7264 8888 hfw.com

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