Trading Straits: Recent Episodes
Reed Smith
Trading Straits provides legal and business insights at the intersection of shipping and energy. This podcast series is hosted by Reed Smith’s market-leading team of shipping and energy lawyers. Join us to hear key developments across the industry, including on emissions, sanctions, LNG and shipbuilding.
In the second installment of our two-part series, international trade lawyer Philippe Heeren is joined by antitrust and competition lawyers Chris Brennan, Natasha Tardif, and Lucile Chneiweiss to discuss practical steps that companies operating in the United States and Europe can take to navigate antitrust risks arising from tariffs. Building on the themes explored in Part 1, this episode offers actionable guidance for in-house counsel, including best practices for information sharing, price adjustments, and implementing compliance safeguards in response to tariff volatility.
In the first installment of our two-part series, international trade lawyers, Mike Lowell and Justin Angotti, and antitrust lawyers, Ed Schwartz and Michaela Westrup, team up to explore the antitrust risks that companies face related to tariffs. They discuss key themes and issues facing companies operating in the U.S. and Europe, and provide insights on what might be coming down the track on tariffs.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges, and topics of interest from Reed Smith litigation, regulatory, and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Mike: Hey, everyone. Welcome back to Trading Straits. I'm Mike Lowell, an international trade partner here at Reed Smith. We know companies are grappling with how best to respond to tariffs, and considering price and supply chain adjustments are often part of that process. With antitrust enforcers scrutinizing competitor conduct, partnering with our antitrust and competition team to chair a two-part series where we'll be discussing the practical impact of recent developments and key priorities for in-house counsel. For our first episode, we are going to explore the various antitrust risks that companies face related to tariffs and briefly touch on what might be coming down the track on tariffs. I'm joined by Justin Angotti from our trade team, Ed Schwartz and Michaela Westrup from our antitrust competition team. Ed, Michaela, Justin, would you all like to introduce yourself?
Ed: Yeah, sure. Thank you, Mike. This is Ed Schwartz. I'm an antitrust and litigation partner based in the Reed Smith, Washington, D.C. And New York offices, and a pleasure to be speaking with everyone today.
Michaela: Great. Hi, everyone. My name is Michaela Westrup. I'm an antitrust partner in Reed Smith's European group. I'm heading the German office, and the focus of my work is actually dealing with cartels and advising companies on compliance issues in this regard.
Justin: And hey, everyone, my name is Justin Angotti, an attorney here in D.C. And one of the leaders of our tariff practice.
Mike: Well, thanks all. Let's jump right into it. Michaela, can you explain the principal antitrust risks that companies face when responding to tariffs?
Michaela: Yes, of course. Well, when companies are confronted with new tariffs, whether those are imposed by the U or the U.S. Or any other jurisdiction, they will face just increased costs effectively and must therefore decide how to respond. The principal antitrust risk I see is where companies would discuss or coordinate their responses with competitors and this includes any agreement or informal understanding or concerted practice about whether, how or when to pass on tariff costs to customers. The European Commission, which is the main enforcement agency in antitrust in the European Union. Treats any such coordination as serious infringement, on par actually with classic price fixing and cartels. The reason is that tariffs, as any other surcharges or input costs, are an integral component of the final price that has to be paid by the customer. And if competitors agree on how to handle those costs, they effectively eliminate independent pricing decisions, which is a restriction of competition, and that deprives the customers of the benefits of the competitive market. So the bottom line is here that any coordination with competitors on how to respond to tariffs or the introduction of surcharges is highly risky and likely be considered an antitrust infringement under the EU antitrust laws.
Mike: That's really interesting. Under what circumstances would EU antitrust law be applicable?
Michaela: Yeah, that's a good question because we're talking about mainly U.S. Tariffs here, so you'd be questioning that. The applicability of EU antitrust law, including the ban of cartel or anti-competitive agreements, is governed by the so-called effects doctrine, which means that it's not the geographic origin of the cost over which undertakings may cartelize, but what matters is where that agreement or coordination takes effect, and if it's within the European Economic Area, the EA. And competition would there be affected, EU antitrust law would be applicable. So it's effectively in situations where a coordination on the handling of the tariffs or surcharges that affects the pricing or market behavior within the EA would take place, for example, if European companies would agree to uniformly pass on U.S. Import tariffs to their customers in the EU. and this restricts competition in the internal market and that would fall at odds with EU antitrust laws. And the same as the case where agreements are concluded on the introduction amount or timing of any surcharges that are part of the final price in the E. Even if the undertakings do not align on the effective price but just the underlying costs. And even if those costs are external, like foreign tariffs, for example. Any coordination that impacts the market pricing in the EA would be covered. So I will add that an infringement would still only occur in cases where companies have some discretion on how to respond or pass on or include into the price the surcharge or tariff. If companies can't independently decide that, be it for regular reasons, for example, if the law asks them to pass on certain costs to customers, there's no competitive discretion and therefore competition wouldn't be impaired by any such agreement.
Mike: Ed, can I pull you in to talk a little bit about the view from what's the United States?
Ed: Yeah, sure, Mike. So the U.S. enforcement risks are real and very substantial. So, you know, I think as most of the listeners know that the risks arise under Sherman Act Section 1, which broadly prohibits all agreements in restraint of trade. And that's the statutory provision under which price-fixing conspiracies are prosecuted, under which private claims are brought. Typically, the Department of Justice enforces Section 1 against those who are engaged in a cartel or price-fixing conspiracy criminally, criminal investigation, indictments, and that is a very real risk that companies face. And there's a good chance that any such conspiracy is going to come out. The DOJ's leniency program, while somewhat hampered by some policy decisions is still effective. And so, you know, cartels, particularly large cartels, global cartels, they tend to come out and trigger investigations by the DOJ. I think it's also important to bear in mind, Mike, that particularly with respect to consumer products, the agencies, including the DOJ, can be quick to open an investigation into possible price inclusion. Even when market factors and independent decision-making can readily explain price increases across a market. One recent example is the DOJ Antitrust Division's investigation into possible coordination of egg prices following the avian flu outbreak. There's every reason to believe, in my mind, that price increases resulted completely from market factors. But the DOJ opened an investigation anyway. We see that every time retail gasoline prices go up, the FTC investigates a collusion at the bump. You know, it's a political action, honestly. So that's from the government prosecution side. And then you've got potential class actions. And once the existence of an investigation or even before an investigation becomes public, we see the plaintiff's lawyers swoop in and file class actions against those suspected of price fixing. And these class actions are extremely expensive to defend. And the consequences can be devastating. I'll just cite one example of where we saw market factors. Changes in a market, impact suppliers in a market similarly, resulting in not just U.S., but global enforcement actions and class actions. And that was the fuel surcharges that were imposed by air cargo carriers and ultimately other industries in the early 2000s led to there was coordination, led to DOJ criminal investigations. Other investigations around the world, class actions. It was a massive, massive set of investigation and cases for those in the industry who coordinated to deal with. Just one more thing that I'll mention, Mike, and that is that the U.S. Agencies are very, very aware of the risks of coordination arising from the imposition of tariffs in the U.S. We saw FTC Chair Andrew Ferguson make a statement after it became clear that companies were going to be facing sizable tariffs, in which he said that the FTC will be watching closely to make sure American companies are vigorously competing and the tariffs should not be interpreted as a green light for price fixing or other unlawful behavior. And a representative of the DOJ Antitrust Division made a similar comment. So the risks are real and the potential consequences are severe.
Mike: That's really interesting. Just unpacking that a little bit and inviting Michaela also to jump in. Have there been any antitrust agencies in Europe or in the U.S. That have previously challenged company conduct in response to tariffs or other trade regulation activity?
Michaela: So, in the EU, I'm not aware of any cases relating to tariffs directly, but what I can say is the EU Commission has, in many cases, made it very clear that any coordination of any cost component, irrespective of what it actually is, is a very severe competition infringement. And there have been heavy fines in almost every sector in the past. Just a few examples, there's the Windows Fittings Cartel of 2012, where nine producers of window mountings were fined about 86 million euros for operating a price cartel, including on surcharges passed on for raw material costs that has arisen. And that affected the buyers across the European Union and the EA. Similarly, in the truck cartel in 2016. Leading truck manufacturers colluded for 14 years on truck pricing and on passing on the cost of compliance with the stricter emission rules. The Commission has there imposed a record fine of $2.9 billion in total, and this shows the infringement that has taken place about surcharges stemming from regulatory changes. Regulatory changes in particular often bring about antitrust infringements and it should be really tear-capped. There should be care taken where tariffs are introduced that companies don't fall into those traps. Finally, a case I want to mention is the Eric Carvel case, dealt with by the European Commission in 2017. They actually dropped the case twice, once seven years before, and then it was sort of taken apart by the courts. They actually brought the same case, but fixed the pitfalls and actually were able to sort of establish the same infringements that they have alleged in their initial decision. In that case, it was notably large-scale coordinated agreement involving 21 air carriers on colluding, on the introduction, and the amount of fuel and security surcharges. And it was fined a total of ultimately $750 million, which sort of reflects the global scale of the cartel and the level of collusion. As Ed has mentioned before, that's not the end of the story in Europe either. So in addition to the risk for fines, you will have the risk for follow-up damage claims. And those oftentimes are even more costly than the fines imposed by the regulators. Even where companies apply for leniency, which should potentially get rid of the fine altogether, there's still that damage claim thing that is a very serious antitrust risk throughout Europe. The cases I've mentioned, only really a very small selection of cases in this area, and it's only at the EU level there's many other cases brought by the local competition agencies of the European member states. So irrespective of whether those cases would be brought as a cartel case or based on an alleged anti-competitive information exchange case, companies should be very, very careful and seek legal guidance before engaging in any discussion with competitors about how to handle tariffs.
Ed: Yeah, so Mike, you know, with respect to prior enforcement actions against companies for price fixing resulting from the imposition of tariffs, we don't have a prior example, which can probably be explained by the fact that, you know, we're now in a tariff environment that we haven't seen since, you know, I defer to you and Justin on this, but as I understand it, since 1909. So we're in kind of a new economic climate here and what companies are having to deal with. But we do You have an example of an enforcement action, actually a private enforcement action in the nature of a price-fixing class action case filed against companies who were accused of price-fixing in response to the imposition of anti-dumping duties. This resulted from a 2021 Department of Commerce action in which the agency imposed duties suppliers of Malaysian rubber thread. And as a result of that, the company Malaysian rubber thread suppliers were allegedly conspired to all raised prices at the same time in roughly the same amounts. And that triggered a class action filed in the United States. The suppliers were ultimately found to be liable and they were able to get the judgment overturned by the Fourth Circuit. But nonetheless, the plaintiff's lawyer somehow found out about the collusion and brought an action. I don't know why there wasn't DOJ investigation, but in any event, there was a private action. But nonetheless, I think the lack of DOJ action in response to collusion resulting from tariffs, I think that can be explained mostly from the fact that we're just in a new era here.
Mike: And obviously, in an era where most of our listeners are going to have antitrust compliance programs in place, and many of those programs may be effective in most cases, are there still practical risks even if they have a compliance program in place?
Ed: In my mind, there are. And I think the risks are twofold. One, look, you know, we all know that when companies enter under severe economic pressure, that there can be temptations for even rogue employees to cut corners. And that is not infrequently how price fixing conspiracies start. It doesn't start from the top. It starts from someone below the top. And so that can happen. But then, as I also mentioned, Mike you know, even improper communications, the sharing of non-public pricing information, that can be powerful evidence if it comes out and sufficient to trigger an investigation and even liability. And on that point, let me just mention that in the United States, the DOJ or private plaintiffs don't need evidence of an express or direct evidence of an express agreement to fix prices. The DOJ or private plaintiffs can get to a jury on a price-fixing case with evidence of parallel conduct, an incentive to collude, an opportunity to collude, and anything that looks like improper communication. So I think it's really critical for companies to really manage their communications with competitors, which are often done for purely legitimate reasons, but that's how improper communications sometimes arise. So I think managing those communications is critical because the risks are there, even for companies who haven't actually colluded.
Mike: Thanks, Ed. And just as we close out the program, I want to bring in Justin, principal architect for our popular tariff tracker and really always has his eye on the ball in terms of everything tariff related. Justin, can you give us a sense of what we have coming down the pike in the coming months?
Justin: Sure, Mike. I think it's really three things. First, I think we will see sometime later this year a decision from the United States Supreme Court on whether the fentanyl and reciprocal tariffs imposed by President Trump under IEEPA were lawfully imposed, and then what the consequence of that means for importers. Second, I think we're going to continue to see the administration use Section 232, sort of the product-specific tariffs that have already been imposed on aluminum and steel and copper, and expand those to additional industries and products. And the last is continued fluctuation. It seemingly tariffs have settled for the moment, but there are two things that I think will really drive changes in the coming months. The first is the administration continues to negotiate with countries around the world. And so countries with country-specific reciprocal tariff rates may see those rates lowered as they reach trade deals with the U.S. And the second is an example we see from countries like India and Brazil, where the United States is now using tariffs as another foreign policy tool in reacting to what are perceived to be national security threats to the United States, much like we have with secondary sanctions threats. And so as the world and the geopolitical sphere continues to evolve, folks need to continue to watch how the US uses tariffs and reacting to that. And as you mentioned, we're tracking all of that on our tariff tracker Monday through Friday. And so you can always check there for the latest.
Mike: Thanks, Justin. That's really helpful. And I think it demonstrates that the risks that Ed and Michaela have been talking about are going to continue to be and potentially get even increased in severity over the coming months and the balance of the year. I want to thank you very much, Justin, and thank you, Ed and Michaela, for today's episode and all of our listeners for tuning in. For part two of this session, we're going to bring in additional members of our trade and antitrust and competition team to continue the discussion of practical steps that companies can take to mitigate antitrust risks when responding to tariffs. And we hope you can join us. Thank you.
Outro: Trading straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's energy and natural resources or transportation practices please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms reedsmith.com and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
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Reed Smith partners Tallat Hussain and Nick Austin and counsel Julie Vaughan discuss the evolving landscape of emissions trading systems (ETS) and their impact on the maritime sector. Key topics include the EU ETS, the International Maritime Organization’s carbon intensity rating scheme, and the UK government’s proposal to extend its ETS to maritime emissions. They explore the implications for shipping entities and the potential for monetizing emissions reductions in the sector.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Julie: Hello everyone and welcome back to Trading Straits. I'm Julie Vaughan, environmental counsel in the Energy and Natural Resources team at Reed Smith in London. I'm joined today by my colleagues Tallat Hussain, an environmental lawyer, and Nick Austin, a shipping lawyer, both partners based in our London office. In this podcast today, we'll be firstly recapping where things stand with implementing the EU emissions trading system for the maritime sector, including looking ahead to some changes that are approaching, and also touching on the role of the IMO, the International Monetary Organization's Carbon Intensity Rating Scheme and some challenges that it's facing. And then secondly, we're going to talk about the recent proposal by the UK government to extend the UK's emissions trading system that operates in Great Britain post-Brexit to also include maritime emissions. We'll be discussing some of the key features of that proposal and also potential international implications. So Nick, if we could come to you first, perhaps you could give us an overview of the current EU maritime ETS and highlight some of its central points for us.
Nick: Yeah, I mean, last year we were talking on previous episodes of Trading Straits about changes to the EU ETS and its extension to shipping last year during the fourth phase of the EU ETS scheme running until 2030. And by way of recap, what has happened is that the maritime sector has been brought in to the scope of EU ETS, the wider EU ETS from the 1st of January last year, initially for ships, commercial ships of more than 5,000 gross tonnes. And listeners of this podcast will remember that what ETS does is impose obligations on the so-called shipping companies who have needed to set up new compliance procedures, open accounts, and ultimately buy and surrender EU allowances annually to cover emissions from voyages which are caught within the scope of the scheme. So I think my sense is that it remains a really big show in town, and it's having a significant impact in the sector, not the least of which, of course, is cost. And we've been working with clients on all of the mechanics of that, from setting up the accounts, making necessary registrations, negotiating charter clauses to suit the needs of owners and charterers. And I think that will continue throughout 2025, because, in fact, this year heralds a couple of new developments for EU ETS in shipping. First from January of this year, the 1st of January, the scope of EU ETS will expand further to include offshore vessels over 5,000 tonnes, which are calling it EU ports. And I think new challenges are remaining for the vessels which have been subject to the ETS already since 2024 in what I would call the next stage of compliance. And that means that the emissions data for the 2024 year has to be reported on and verified by an accredited verifier by the 31st of March this year, just some weeks away. And ship owners and operators then have a further six months until the 30th of September to submit the correct number, hopefully correct number, of EUAs, the allowances required to cover their emissions so verified for 2024. for. And a failure to do that can, of course, mean potentially hefty financial penalties. And those responsible in companies for ETS compliance will need to make sure that they're obviously well prepared to meet those deadlines. It's also worth remembering, and you touched on this, Julie, in your introduction, that the IMO is plowing its own furrow on decarbonisation quite separately from the EU and indeed the UK. And the CII, the carbon intensity indicator, was introduced now back in 2023. And that's, as we've said before, a rating scheme from A to E for vessels based on their so-called carbon intensity. And that's measured by an equation which, among other things, takes into account the size of a ship, its distance sailed. And 2024 was It's the first year in which ships were given actual ratings from A being the best, obviously, to E being the worst. And I think what's happened in recent months is that the operational realities of shipping have highlighted big challenges with CII, and there have been widespread calls in the industry for revision, most recently at the MEPC 82 meeting at IMO in London in September. And I think some kind of recalibration looks likely, particularly around the issue of idle time, ships sitting around doing nothing. Because one of the central challenges with CII is the impact of waiting on a vessel's CII rating as opposed to being on the move. And ships which frequently spend extended periods at anchor and port or perhaps undergoing maintenance without carrying cargo can be penalized. And I think the IMO and the industry have recognized that that may not be satisfactory. So there's a lot going on there too, and I think that's a space to be keenly watched. Tallat, let me bring you in, if I can. The UK is proposing itself to include maritime shipping emissions in the UK ETS. Can you tell us a bit about the context of that and the proposed new requirements?
Tallat: Sure. Essentially, Nick, the UK is following in the EU's carbon footsteps. The maritime sector is proposed to be brought into the scope of the UK ETS starting in 2026, and this may have potentially significant implications for the industry in terms of cost of compliance, operational changes, and the impact on existing and future contractual arrangements. I'll just set up a bit of further context here. As maritime transport plays a critical role for global trade, whether in goods or commodities, and significantly in transportation of oil and gas, it has now become a target for regulatory change. But it's also because of the fact that it has and is a large and growing source of greenhouse gas emissions. According to the European Commission, if left unaddressed, global maritime greenhouse gas emissions could increase by up to 130% from 2008 levels by 2050. Which would undermine the global climate change initiatives that are being set under agreements like the Paris Agreement. So in the UK, while shipping is generally regarded as a carbon-efficient model for transporting freight, domestic maritime emissions in the UK account for about 5% of the country's total transport carbon emissions. And by way of comparison, that figure is estimated to be more than the domestic rail and bus emissions combined. So shipping emissions include more than carbon dioxide as well. And the proposal expands to maritime methane emissions as well as nitrous oxide emissions. And these are represented as carbon dioxide equivalents. So all of these elements of the maritime shipping sector are being included. And because of this, decarbonizing the UK maritime sector is considered to be even more crucial to the country's wider carbon emissions targets. Plus, as you're aware, 2024 was a busy year for shifting policies in the EU as well as in the UK. The UK government announced its most ambitious target yet to reduce carbon emissions by 81% by 2035. The proposed maritime expansion of the UK emissions trading system feeds into this. With the connection to the UK's international obligations for the expanded cap and trade system, the cap for the UK ETS will need to be adjusted. It's currently proposed to be around 2.4 million allowances per year between 2026 and 2030, but that's just the proposal right now. Of course, including maritime emissions is meant to reflect the government's long-term strategy for UK emissions trading, as well as concerns that the price of maritime fuels does not reflect externalities, like environmental costs. Although it's also intended to incentivize the adoption of fuel-efficient technologies and low-carbon fuels, which should have the co-benefit of growing the UK's low-carbon sector. But this is an ambition that we would have expected. And this, of course, should be encouraging efficiencies in operational practices for ships as well. But all of this, although it sounds like it's easily workable, may have operational and compliance challenges as well as transaction impacts. And you mentioned some consequences, Nick, under this comply or pay approach, allowances will need to be secured for each ton of carbon dioxide emissions from domestic maritime ship activity in the UK, including emissions caused by vessels both while at anchor and while moored as well as by vessels both at sea and at offshore structures. Unlike the UK ETS, currently the obligations are on operators but how to apportion responsibility is more complex when it comes to vessel ownership and chartering arrangements. The UK ETS proposal is that obligations will apply to the registered owner of the ship unless responsibility for the UK ETS compliance is somehow delegated contractually by the owner to the entity that operates the ship. Apportioning rights to green attributes, as we know, like carbon equivalent emissions reductions or obligations that go with them may need to be resolved on a contract-by-contract basis. Also like the EU ETS, the scheme is meant to run by calendar year from January 1 to December 31, starting in 2026. But unlike the EU Maritime ETS, the deadline for surrendering allowances is by April 30 of the following year, rather than September 30. The reporting deadline is the same, which is March 31. But it's not unlikely that non-alignment with any surrender dates may be a subject of comments in the consultation, especially considering that it may impact a proposed linking of the two systems. In terms of compliance mechanics, additional to the obligations to set up a registry account, covered entities will need to apply for approval of their greenhouse gas monitoring plan and appoint an independent verifier accredited by the UK accreditation system. The intention is for the UK Maritime ETS to align with the existing monitoring, reporting, and verification regimes and the international reporting requirements, with the intent of making it easier for transition for larger ships that are already subject to the MRV, as they have systems in place. Again, aligning the mechanics of the two systems will support any linkage of them. This shouldn't be a regulatory burden for ships over 5,000 GT. But there may be administrative processes to contend with. Interestingly, in the international context, application of the UK Maritime ETS hasn't escaped some of the lingering post-Brexit complexities. As Julie mentioned, these can't be avoided at this point. Julie, could you explain the current proposal and impacts of the application of the UK ETS to shipping emissions requirements in light of the Brexit issues, in light of what's happening between Great Britain and Ireland and considering the EU maritime ETS?
Julie: Yeah, sure. This is quite a difficult one because the EU scheme covers 50% of international voyages between member state ports and ports outside of the EU jurisdiction. So that includes ships that are travelling backwards and forwards between ports in the Republican Ireland, which is, of course, still an EU member state. And ports in Great Britain, England, Wales and Scotland. But because of the deal struck when the UK left the EU, Brexit, which is known as the Northern Ireland Protocol, and subsequently adjusted through the Windsor framework to make it slightly more operationally workable, the EU environmental laws still apply in Northern Ireland as well even though of course Northern Ireland is part of the UK. So under the proposals for the extension of the UK scheme it's proposed to cover 100% of emissions between domestic and between UK ports. So the effect of this is that there would be a 100% cost of emissions for voyages between Great Britain and Northern Ireland, which would then be more than the 50% that's charged under the EU scheme between ports in the Republic of Ireland and Great Britain. And this has got the potential to distort trade between the two, with people possibly diverting goods down by land from Northern Ireland down to the Republic of Ireland to avoid the higher cost of then shipping them across. So one of the options the government is considering to avoid that negative consequence is to ask shipping companies to still monitor and report 100% of the emissions between the UK and countries within the EU system, including Northern Ireland, but only then to actually impose an obligation to surrender 50% allowances representing 50% of those emissions. The alternative, though, that's also under consideration is to charge all voyages to and from the European Economic Area 50% for their emissions. So that the 50% that we charge and the 50% that the EU charges would mean effectively that the rates charge between Northern Ireland and the UK, 100% under our system, and that which is paid by shipping companies for voyages to other EU countries, including Republic of Ireland, would be the same. The government hasn't actually reached a firm conclusion there. It's obviously a difficult one and they're still considering that sort of conundrum and they're open to further discussion as to what the best solution is for that. The UK has to be careful, though, not to discriminate between the deal that it's giving to individual third-party countries here, because it has to be mindful of the obligations that it's got under the World Trade Organization agreements as well. The government's also, though, considering a further expansion, so beyond the European economic area countries, to also bring in international voyages to and from the UK. But this isn't something it's going to do in the near term. It's ruled out doing that before 2026, certainly. And what it's doing is essentially what the EU itself did for a number of years was to wait and see if further, more stringent action is taken by the IMO. So such you might be able to avoid broadening the scheme to the international voyages. So Nick, with the EU context in mind and based on what you've seen so far with the implementation of the EU maritime scheme, where do you think UK shipping companies stand now in terms of the application of the emissions trading systems?
Nick: Well, thanks Julie, it's an interesting question And I think if we're trying to understand, even in these relatively early days, how the UK ETS might be rolled out, and in particular what pitfalls may be sort of lying in wait, the unwary, I think we can learn a few lessons from how the EU ETS was implemented in 2024 and in the run-up to that. And perhaps the best example of that is where and how the EU decided to allocate non-EU registered shipping companies. And in the shipping industry, there are a lot more of those than there are ones based in the EU. But to allocate those apparently randomly to particular member states within the EU would then have the responsibility for administering and enforcing the scheme against that company. And a list was published where companies were allocated a member state and the connection between the member state and the company was supposed to be where ships owned by that entity had perhaps most frequently called or visited or had some other connection. But that gave rise to anomalies because of the complex way in which ships are owned and managed around the world by different entities, even within the same group. So we had the sight of Spain, for example, being lumped with dozens of largely Asian, not exclusively, but plenty of Asian shipping companies whose only connection with Spain was that one of their ships had at some point bunkered or taken on fuel, Algeciras or some other Spanish port. And that was seen as anomalous and gave rise to a considerable degree of uncertainty and threat in the shipping community. Coming back to the UK ETS, the consultation period is, I understand, now over. And one hopes there has been considerable and constructive feedback from the industry and from other stakeholders on the practical aspects of scheme participation. You've mentioned the Ireland-Northern Ireland issue, which is clearly a headache and will require some sort of resolution. And not only that, the regulatory regime, the account requirements, the operator requirements, monitoring, reporting, and verification, which I think, as Tallat said, will align to the existing rules that are in place already so-called points of obligation when you're obliged to do things guidance and so on all of that will need to be thought about very carefully in the run-up to 2026 now there's only one country to to register in but it will be critical to ensure that we in the uk do roll out a smooth and efficient set of procedures for registration and and and starting one's participation in the scheme. And one hopes that that will be done in a sensible manner to avoid some of the challenges that we have seen. And I know you, Julie and Tallat, have also seen and continue to see with global clients having to grapple with in the EU ETS scheme, in particular around setting up accounts in various countries throughout Europe. Last but not least, I think as the UK ETS gathers pace and we start to hear more about it and read more about it, we, as we did with the EU ETS here at Reed Smith, will start to get requests from owners and operators and charters and commodities companies to review wording for use in commercial contracts, commercial negotiations. And those points will need careful consideration, including in time charter parties, because there will be a cost, as there is with the EU ETS, and that cost will need to be allocated between those who are otherwise responsible for them. And we, in the time charter market, the market for the hire of ships for long periods of time, there was a challenge with EU ETS in understanding the mechanics of how and who that should be paying for those allowances. And you have the sort of tension between the payment, the requirement to pay the allowances, but also the fact that a time charter, someone who's renting a ship for a period of time, has the ability to wreck the vessel and use the vessel as it sees fit in commercial terms. So it's really the orders of the charters, which the ship owner is obliged to comply with, subject to a few exceptions, but the ship owner must do what the charter reasonably orders him to do in terms of the employment of the ship. And so it's the charter who is, in a sense causing the emissions to be created and therefore who under EU ETS is liable for the costs of that under time charter party arrangements. So that I think will come to the fore and it'll be important to get that right just as it was with EU ETS despite the more limited territorial application of UK ETS. And in my experience, there's no one-size-fits-all answer to these questions. As always, it depends on the commercial relationship and bargaining positions of people in the shipping industry. And I think a tailored approach will be needed. So we will see, is probably the shorter answer to that question, Julie. Tallat, do you have any particular take on that or those aspects we've discussed?
Tallat: Yeah, Nick. I mean, I think the impact will be significant, as it will create pressure points in the interactions between shipping entities and regulators, potentially even lenders and other transaction counterparties. As we've said, the UK maritime ETS allowances will be tradable on the carbon markets, so there will be opportunities to monetize the value of the allowances, but the intention of emissions trading schemes generally is less about monetizing carbon value, but more about managing externalities that impact climate change, and in this case, as a result of maritime operations. That is, to ensure that the price of maritime fuels reflects their environmental costs. As a consequence the government is looking for a system to be in place that incentivizes the adoption of low-carbon fuels, of fuel-efficient technologies, and greener operational practices for ships, which, again, raise some of those conflicts that you've just mentioned. We expect that there will be more refinement based on the outcome of the consultation, and ideally that means that there will be a need for additional guidance. There may be some harmonization of standards and appropriate bodies for measuring and reporting, other efficiencies to ensure that there isn't an added compliance burden, which we know that the government has said that they're trying to remove all of that regulatory red tape in the UK right now. But as you said, Nick, charters and owners are going to have to keep up with the developing regulatory landscape around both the UK ETS emissions trading schemes around the world, including and especially the EU emissions trading scheme. It's the charterers of ships, as you said, that dictates the vessel's emissions. And this raises questions that will need to be addressed between the parties, including how data and information will be shared between parties, the mechanics of charterers transferring allowances to owners, for example, and what happens on the failure of transfers and other carbon trading related issues. Now that the consultation has ended for the UK's proposal, it will be interesting to see how this translates into the carbon emissions regulatory framework. Especially in light of the current geopolitical challenges on the horizon, none of which we've actually all anticipated or the government anticipated in the development of these rules in the first place.
Julie: Indeed. Well, that brings us to the end of today's Trading Straits podcast. So thanks to Tallat and Nick, and thank you to you for listening. We hope you found our insights interesting and helpful too. If you have any questions, please do get in touch with any of us or your usual contact at Reed Smith. Thank you very much.
Outro: Trading straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's Energy and Natural Resources or Transportation practices please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
A new generation of barcodes is enabling faster, safer and more transparent transactions across industries and regions.
In this episode, Nicolas Frerejean, director of marketing and digital transformation at GS1, the global standards organization behind barcodes, tells Reed Smith partner Wim Vandenberghe how the next generation of barcodes can offer even more information and benefits to consumers, businesses and regulators. He shares fascinating examples of how barcodes are used in retail, healthcare, food, construction and other sectors.
Whether you are a manufacturer, a retailer, a consumer or a policy maker, you will find this podcast insightful and informative.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Wim: Hello and welcome to Trading Straits. My name is Wim Vandenberghe and I am a EU regulatory product lawyer in the Brussels office of Reed Smith. With me on today's podcast we have Nicolas Frerejean who is the Global Director of Marketing and Digital Transformation at GS1. Nicolas, thanks first of all for participating in our podcast on the global supply chain and what the role barcodes in GS1 play in there. Maybe to kick off, could you just please tell us a little bit about yourself and GS1?
Nicolas: Yeah, hello, Wim, and hello to everyone. Thank you for receiving me to this podcast. Really excited to be able to spend a few minutes talking about GS1. Myself, I'm from Belgium. My name is Nicolas Frerejean, and I've been working for the last five years at GS1, managing deployment of all our global marketing initiatives across our local organizations. And what is GS1? That's a great question to start. GS1 is really a global standards organization. We are a neutral, not-for-profit organization, and I guess we are best known for one of our iconic products, which is the barcode. The barcode has been named by the BBC as one of the top 15 inventions that made the world economy. And this is one of the icons that we do behind this. We actually do develop global open standards to facilitate and to help the exchange of data across industries and across trading partners in the supply chain.
Wim: Excellent. We're very happy, you know, that you could carve out some time today with us, Nicolas. And then I think you touched already on, you know, kind of the first question that I had about what the impact of barcodes has been, you know, for the last five decades, because they've been around for quite a while. And you've said it has been an amazing invention and really critical to the global economy. And I'm just wondering how you see that impact from the past, but also looking ahead into the future, what is coming next for barcodes as well?
Nicolas: Yeah, the barcode was actually introduced for the first time 50 years ago. That was in 1974. and the very first product that was count was a chewing gum pack in Ohio in the United States. The barcode really changed the way consumers check out at the point of sale and by enabling to identify a product and connect that product to its digital identity we've been able to connect the product to its price and make sure that we can make supermarket queues a lot shorter make the checkout process faster. And then also over time, we've grown the use of the barcodes to help making supply chain much more efficient and to help the management of inventory, stock the fulfillment at distribution centers. Now, the barcode, as I've said before, has already been around for 50 years. And while it will still be around for many years, we are starting to work on what we call the next-generation barcode. And we are starting to work with industry to transition to the next generation of barcodes, such as, for instance, QR codes powered by GS1 or the GS1 data matrix.
Wim: Right and I mean do you have, I mean you have such you know so much experience, I mean do you have a couple of like use cases for those next generation barcodes you know that just as an example you know what exactly can be done with it.
Nicolas: Of course. The the main difference between the traditional barcode and the next generation barcode like a QR code is that they can carry much more information than traditional barcode and they can also enable consumers to with a simple scan to connect to the web and and as such manufacturers can start having much more information in the next generation barcode such as the batch of the log number such as expiry dates for the product and so on and so forth so that would enable for instance consumers to actually scan a product in the supermarket market and get access to the information which is linked to that specific product. They would be able to know where does it come from? Where was it produced? Was it produced in a sustainable way? What are the ingredients if we're talking about a food product? Does it contain allergens? And all of that, we enable consumers to make better choices and also safer choices for them when it comes, for instance, to food products.
Wim: Right. It's clear that this is really something that applies kind of cross-sectoral you know you've touched on retail and supermarkets I can imagine you know also in kind of let's say energy of commodities it'll play a role as well as in you know healthcare and life science. How do you see that you know that kind of like cross-sectoral application?
Nicolas: Yeah we have expanded over the years across many industries and this next generation barcode can truly play a role across different industries, making sure that in the end we can improve the experience for consumers, the safety also for consumers and patients and even traceability across different industries. Let me maybe give you two examples starting with retail then moving to healthcare. When it comes to retail we have seen with different industry members. Let me mention Woolworths, which is the largest retailer in Australia. They've been able to include in fresh products the expiry date of the product to make sure that products that would get closer to the expiry date would actually benefit from dynamic pricing and be sold faster to consumers. And also that products who would have passed the expiry date would actually be stopped at the checkout. The impact was that Woolworths has been able to reduce food waste by 40% and also enable that products with expiry date, which have passed, would not be sold to consumers, making sure that it would enable a much more safe supply chain for the consumers. In healthcare, actually the next generation barcode has been around already for 20 years. Also enabling in the healthcare industry better traceability, better efficiency of some processes in the industry, and in the end also improving the safety for the patient. Two examples also, nurses in the hospital would actually be able to scan medicines before giving it to the patient to make sure that that would match the right prescription. That the dosing would be correct and preventing possible medical errors. Instruments in the surgery room would also carry a next-generation barcode to make sure that they can be scanned before and after the surgery, making sure that all the equipment would be accounted for, sterilized, and also preventing mistakes. So very, very, very concrete use cases on how that simple next-generation barcode can help safety for consumers and patients. We are now also expanding the use across different industries, construction industry, rail industry. All of that is helping to better trace products across the supply chain, making sure that we know exactly how to use them, and also helping sustainability. Because by knowing exactly what we use and by being able to trace product across the supply chain, that eventually enables to recycle and to move more and more towards a circular economy.
Wim: These are great examples and all those aspects about guaranteeing or safeguarding food safety or traceability of drugs, medicine and devices, and ESG and sustainability requirements, they are so much top of regulations, right? I mean, a lot of that has also been imposed, whether it's the US Drug Supply Act or here in Europe, with ESG requirements and product digital passport coming in in the next couple of years. That kind of brings me a little bit to the next question is that what is the role that regulatory bodies would play in the adoption of those kind of new next generation barcodes? But also like GS1, you know, who is actually kind of doing the work, implementing all of that.
Nicolas: Yeah, this is a great question. We see all over the world a growing trend for more regulations and regulations asking for more transparency about the products, making sure that the products would be safer for consumers and for patients and making sure that they can also make more informed choices about what they buy, what they consume, and what they use. And as such, with GS1, we are working very closely with authorities, with regulations, to understand how we can support the implementation of regulations and support the industry by doing so. One of the main benefits of GS1 is that we develop open standards. And by having open standards, we make sure that anyone across the value chain, across different countries can use them, from very large organizations, but also small organizations. And we make sure also that the processes of data exchange can be made efficient, and that a product which could be produced in Asia can easily be read and introduced into the EU market. So the benefit of global open standards is really to enable also that transparency, which is coming more and more through regulations.
Wim: Right and you know we we talked a little bit about the kind of the product identification or for example what if it's about a food product what ingredients does it have you know to inform the consumer you know what he or she is eating any allergies etc. I’m wondering you know what else you know could it could be facilitated by those barcodes and next generation barcodes like I'm thinking of, you know, there's always talk about instructions for use. Like if you buy something and then you get this leaflet, you know, which sometimes is like literally a book, you know, or is that something that would be also, you know, could be done digital in that way and given to the customer?
Nicolas: Yes. I mean, there are multiple use cases and really the sky is the limit here. Medical leaflet indeed is one possible use case where indeed you could receive instructions which would be personalized in your own language instead of receiving that that huge leaflet could also be updated automatically because things changes and by enabling to connect the physical products to digital identity into web-enabled content we can also make sure that information would be updated and available to consumers or to patients with the latest possible updates. We see also many possible use cases and concrete stories about how to enable, a more sustainable economy. For instance, we see that EU regulations are coming with a digital product passport. With enabling the products to give access to instructions about how to recycle, how to reuse, how to refurbish the product. All of that can be accessed through the next generation barcodes. One concrete example I would like to give you is a use case that we've worked with Coke. And they've launched a bottle that can be refilled five times. But for that, you need to be able to count how many times the bottle has been refilled. So Coke has introduced on their bottle a QR code powered by GS1 with a serial number that enabled to identify that specific bottle and count the number of times that that specific bottle would be refilled, enabling the usage of that same bottle for five times, and then that bottle to be recycled. That's a very specific use case on how step-by-step manufacturers can use information and can identify products to enable this more sustainable and circular economy.
Wim: Right. And that absolutely fits in today's circular economy and the drive for sustainable products and looking at the environmental footprint as well of the business. That really fits squarely in there, right?
Nicolas: Totally, totally. This is one of the big priorities we have, which is how we can help industry implementing solutions that will improve the sustainability profile of their product, that will enable in the end consumers and patients to make much more informed choices about what they buy, what they consume, and in the end to benefit society.
Wim: Excellent. Nicolas, maybe just to close off, or unless you have other thoughts as well, I was just wondering for you, looking ahead, and you've already given some examples of really new technological advancement. What else would you see in maybe the future, but not too future distance?
Nicolas: Well, I would say two things. First of all, today we are in the middle of this transition from the traditional barcodes that have been around for 50 years to the next-generation barcode. GS1, together with the industry, we have set an ambition that by 2027, most of the stores would be equipped with the ability to read both the traditional barcode, but also the next-generation barcode, and also that most of the products sold would be equipped with next-generation barcode and give that possibility to connect to much more information. Now, information is key. And as you know, with AI, engines are basically fed by information. By having this next generation barcodes, we can actually increase the amount of information that can be used by consumers. And we can also increase the trust that information is coming from the right source, from the manufacturers. And that will enable use cases which are much safer for consumers to access better information, but also by using more information, you can have personalized content. You can also enable manufacturers to engage with their consumers post-purchase. Think of the example of a product recall. Brand owners, manufacturers could actually connect back with the consumers post-purchase to warn them that the product is suffering from a recall and should not be consumed or used. And then we can go on and on because technologies like AR could be used also to further augment the experience of the product. So what we are giving is a gateway to much more information and also better quality data because they're coming from the right source.
Wim: Excellent I mean your recall example really speaks to me because you know as a as a product lawyer I’ve done I had to do a couple of those for clients and very often it's still in a very kind of arcane way where you know you have to then try to figure out where you sold you know to which distributors and and supermarkets or retailers and then those retailers and literally they go and hang up physically like a letter you know in their supermarket or shop you know like saying this item with a picture of it and also I can only imagine how much easier it is I mean also obviously for the safety of the customer but also for the business you know if you can do that in a more automated fashion. And I really like also the way that you bring maybe a more traditional kind of concept of supply chain and you bring that in in kind of touch with ai you know and really kind of that interaction for creating more information and personal approach to it as well. That's a great example too.
Nicolas: Exactly.
Wim: Well, Nicolas, thank you so much for coming on the podcast. It was great hearing your ideas about the present and the future for barcodes. And finally, I'd just like to thank our listeners to joining us. And please check out some more content on supply chain if you'd like this episode. Thank you.
Nicolas: Thank you, Wim. Thank you for receiving me.
Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's energy and natural resources or transportation practices, please email tradingstraights@reedsmith.com. You can find our podcast on podcast streaming platforms, reedsmith.com, and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
Reed Smith partners Nick Austin and Alex Brandt explore today’s challenges faced by the shipping industry and discuss key areas where we are likely to see the most activity in 2025, including sanctions, decarbonisation and legal developments in the courts.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Nick: Hello, everyone, and welcome back to Trading Straits. I'm Nick Austin, a partner in the shipping team at Reed Smith in London. I'm joined today by my friend and colleague, Alex Brandt, who's also a partner in the London shipping team. Alex and I both have the privilege, some would say, of working in an industry, the shipping industry, which is heavily impacted by markets, geopolitics, technological change, decarbonisation, and a raft of legal and regulatory changes, and no more so, I think, than now. So in this podcast, we're going to be looking in broad terms at what 2025 might hold in some of these areas. And with a particular eye on where as lawyers we're likely to see the most activity. We don't have a crystal ball, and we can't possibly cover everything today, but we do think there will be some themes that will continue to emerge throughout the year. So, Alex, if I can come to you first, I mean, I know that you spend, some would say, indecent amounts of time advising clients on sanctions in the maritime and commodities world. Russia has, of course, dominated the headlines in that regard. How do you see 2025 developing?
Alex: Yeah, thanks, Nick. And it's nice to be back on Trading Straits. Yeah, well, look, as you say, 2024 was a big year for sanctions. And I think there were a couple of key themes that developed. The G7 really continued to clamp down on the trade and the transport of Russian oil. And I think having come up with a novel scheme, the G7 price cap, which allowed the carriage of Russian oil and support for that trade, albeit under sort of you know attestations and a regulated process what had happened from that was the emergence of the shadow fleet which is obviously dominated not just the trade news but but you know international news and particularly events going on in the baltic at the moment and so really you had this castle mouse game with the regulators concerned with the monster they'd created with the shadow fleet and trying to cut down on circumvention and that that really sort of you saw that in two ways. One is the guidance around the sale of tankers trying to stop vessels going into the shadow fleets. And the second is the increasing sanctioning of. Dark fleet, shadow fleet, parallel fleet actors, vessels, trading houses that have emerged in certain jurisdictions who are seen by the G7 as facilitating breaches of price cap and keeping that Russian oil flowing at levels that the G7 are uncomfortable with. So that's what 2024 was really framed by. 2025 from the sanctions landscape has already started with a bang. We had on the 10th of January, 183 more vessels designated by the US, a significant focus on Middle Eastern trading houses, focus on LNG projects by the US as well, and critically. Two large oil producers in Russia, Gazprom Neft and Surgutneftegas. We were only in the first month of January. Hard to know exactly where we'll end up with the Trump administration, But it's certainly the case, I think, that the first half of 2025 is going to see more of the same, more of a tightening on Russian oil, more of a tightening on circumvention, continued concern with the threat that the parallel fleet poses, not just from a sanctions perspective, but also safety environment. And now with this sort of the suggestion of sabotage of key infrastructure in the Baltic. So I think that will be one of the key themes going forward. I think the other interesting area will be Iran, harking back to 2018 and the first iteration of the Trump administration. Trump was really the architect of the modern sanctions program, particularly when looking at Iran and the withdrawal from the nuclear treaty. And I think we can expect to see what we saw then, which is interference with cargoes on board vessels that are believed to have originated from Iran. So, you know, it's going to be a complicated environment. You know, it's going to be a dynamic environment and we'll have to feel through it day by day, week by week, as we have been doing. So, you know, that's three, four minutes, whatever it was, crystal ball gazing. I know that you've been working with clients on various decarbonisation initiatives. Where do you see the main features of that? And I guess, indeed, the challenges going into 2025?
Nick: Yeah, thanks, Alex. And I mean, that's right. As if shipping didn't have enough to think about from sanctions, war risks and other geopolitical developments. Decarbonisation in the sector in terms of new regulation affecting the operation of vessels on a daily voyage-by-voyage basis is really continuing apace. And I think 2025 is set to be no different to the last two or three years we've had in that space. Before I get to the latest regulation, it's worth pointing out that the industry is still having to deal in depth with CII and EUETS. And a quick recap on both of those, a reminder that, of course, CII was introduced by the IMO in 2023 as part of its strategy to achieve net zero emissions in the maritime sector by 2050. And that's a rating scheme under which vessels, a bit like a fridge, get a rating from A to E based on their carbon intensity. And that's measured by an equation, which among other things takes into account the size of a vessel and somewhat controversially its distance sailed as we'll see. And 2024 was the first year, so the year that's just finished, in which ships were actually given ratings, from A being the best to E, the worst. And from a legal perspective, and I know you've been dealing with this too, but clauses in timeshaft parties, which is where tensions most obviously arise with CII. Have tended to be agreed now for a couple of years, usually some version of the BIMCO clause, but very varied around that standard wording. But of course, now that ships have actual CII ratings, the rubber hits the road, and the legal is meeting the commercial, in a sense, in terms of the impact that the rating is going to have on the marketability, the value of a vessel. For example, if it's re-delivered to its owners with a lower rating than it started with. And I think those issues are going to rumble on in 2025, and particularly if a vessel might have been sub-chartered by a time charterer and a rating thereby affected, which the time charterer isn't able really to visit on the voyage charterer under the freight regime. And it's fair to say that CII has come in for widespread criticism from the industry, really, from the moment it was launched, and in fact, before. There is going to be revision, most recently at the MEPC 82 meeting at IMO in September last year in London. That were very loud calls for a complete recalibration of CII, ensuring basically that it better represents true operational efficiency and actual emissions performance. And one of the issues, as I mentioned, in terms of distance sailed, is the so-called idle time, ships waiting around doing nothing, tend to be prejudiced in the calculation of CII ratings. And that has been perhaps the one-off, if not the central challenge. Ships are frequently spending time at anchor, in port, undergoing maintenance, dry dock, during which emissions will continue to accumulate without actually carrying any cargo. And that, rather artificially in the view of many, will give it a poor rating. So changes afoot with CII. The new Secretary-General of IMO has said in recent months that he is listening to the concerns of the industry on CII. And I think we'll see changes perhaps even before the official review date of 2026 so watch this space on that. EU ETS remains another show in town. From the 1st of January last year, shipping came within the already well-established EU ETS regime. As we've discussed on previous podcasts. And that's had really significant implications for the sector, not the least of which, of course, is cost. Again that's an EU concept it imposes obligations on shipping companies as they're defined who need to set up new compliance procedures, open operator accounts within the EU and they need to buy and surrender allowances to cover the emissions from voyages that are caught by the scheme 40% in general terms of this year shipping companies need to surrender after verification And it's this year that, of course, the performance and the compliance of EUETS is really coming into play in terms of the verification in March and surrender later this year of the 2024 allowances. Now again a bit like CII we've been working for a year or two now with almost all our clients in the shipping world on the mechanics of that setting up the accounts making the registrations and of course negotiating charter clauses to suit owners and charters needs and in fact anecdotally just today I heard from a colleague involved in setting up accounts for EUETS that it is taken in the Malta and the Netherlands. Some clients, over a year to establish the necessary accounts for the purposes of compliance. So it has not been easy for businesses to get used to this brave new world. In terms of the clauses, BIMCO is the standard starting point. Again, a big variety we've seen in the clauses that are being negotiated and agreed in the time charter market. Will all of that work out as the compliance of the EUETS really revs up this year? Well, we shall see. And last but not least, on DCARB, I think for this year, is the new kid on the block, Fuel EU Maritime, which is another EU, regime, effective from January this year. And what that does is set well-to-wake greenhouse gas emission limits for fuel used on board vessels trading within the EU or to and from the EU. And again, really significant challenges are emerging and have emerged with FuelEU, noticeably, so far as I'm concerned, in the negotiation of clauses. BIMCO have done, again a sterling job in producing a template clause which so far in my experience has been greeted generally positively albeit as you might expect owners and charters are seeking bespoke solutions to those provisions to suit their commercial needs and to make sure that the allocation of costs and risk where penalties will need to be paid under FuelEU maritime is dealt with for their own best interests, but also in the interests of those they're seeking to do business with. What the limits are of that in terms of give and take, I think remains to be seen, but that is going to be a real thing for 2025. And certainly there seems to be no let up in work needed in that space. So Alex, that's a run through of where I think the main action will be on the decarbonisation front. You talked earlier about Russia, which I thought was really interesting, setting the scene around that for 2025. What are going to be some of the more practical implications for clients in this sector as we look forward to the coming months in 2025?
Alex: Yeah, thanks. Thanks, Nick. And really interesting hearing you speak on decarb. I think I've been mulling over this myself and mulling it over with the team. The reality is that trade has become more complicated and there's more sand in the gears of trade, particularly when it comes to sanctions and due diligence. And this will be my surprise, I think, to our audience, there's going to be a lot more focus on due diligence. And I think that falls into several buckets. And then the first is knowing your counterparty, KYC, who are you getting into bed with? And the consequence of geopolitics has meant that there's been an emergence, a brave new world of traders, charterers, operators that have established in places like Dubai, the Middle East and others as well. These companies have been newly formed and don't have a huge amount of track record behind them. Information on publicly available databases is limited. And so the legal compliance and indeed leadership have to make difficult decisions about whether and to what extent and with what guardrails they want to do business with these people. And I think that's the first thing. And that has been a theme of last year, but it is only going to get more complicated. And as we look at the recent guidance that's coming out, and all of the focus on circumvention, you know, the counterpart circumvention and who you're dealing with, that's going to be a key aspect of it. So I think that's the first. The second is due diligence on vessels and, you know, the parallel fleet, the dark fleet, whatever name you ascribe to it. You know, there's tempting, you know, if you're explaining it at a dinner table. It's tempting when you hear that definition to say, you know, is this Putin's navy? You know, is this a group of vessels under a common sort of ownership and common purpose and common management structure? That's obviously not the case. I mean, there is no legal definition of the parallel fleet. It's ultimately a construct of the media. And when one looks at the 600, 700 vessels, 1,000 vessels, however many you say that there are, actually when you look at them, they have very different characteristics. So obviously similar themes, but different characteristics. And I think the challenge for the industry is, as we go into a bifurcated world, how do we weigh the risk? How do we interact with the shadow fleet? Is it the shadow fleet at all? And what risk does that pose to our business? That is something that is clearly going to continue in that debate and that challenge around that is clearly going to continue. So I think that's the second one. The third one is the origin of cargo. And repeatedly now, the regulators are warning us about fraud and falsification of documents and that cargo from sanctioned jurisdictions or sanctioned cargo, however you want to describe it, is being laundered through fraudulent documentation. That is not a surprise. I mean, that's a method that's as old as the hills. But trying to spot that, trying to operationalize that in real time. Is challenging and it throws up real challenges for the compliance team and also the interaction between legal and compliance functions within our clients and the commercial, the frontline and decision makers. So that will be a key theme that goes forward. And obviously, if you get it wrong, the consequences are draconian. On the UK side, we've got strict liability. Strict liability on the US side, always be non-compromising about these sort of things. So that is a challenge. And I think the final part is where is the cargo going? It's the flip side of that coin. And again, only a few weeks ago, we saw the UK introduce a no re-export clause. The EU has already been trying to do it in certain sectors. The recognition that key commodities are flowing to sanctioned jurisdictions such as Russia, the recognition that it is very difficult to know if you are part of that initial supply chain, very difficult to know where the commodity or cargo is ending up. But at the same time, there is clearly an impetus on the part of government to try and stop and try and curtail those supply chains. And so with all of that will be a holistic sort of review of compliance policies, processes, and also, as I've alluded to, once again, going back to our sanctions and compliance clauses and updating and making sure they're in line with the recent government guidance and wisdom that is being promulgated. I think that is what the years has in store for us, or at least the first part of it. And I know already from colleagues in the industry and our own work. It's an extremely challenging time trying to manage these risks. And I'm afraid I don't see it getting easier, or perhaps I see it getting harder before it gets easier. I appreciate that won't be welcome news. But that's me whittling on about sanctions again. Look Nick 23-24 they were they were busy years and we saw some groundbreaking legal cases in the going through the english court these cases have had you know real practical significance for shipping what are we looking out for in 2025 what's what's coming up in the pipeline that the listeners should be aware of?
Nick: Yeah thanks Alex and just before I answer that you mentioned the parallel fleet and the shadow feet it used to be known as the dark fleet has that term been abandoned for being too Star Wars like?
Alex: Does have a ring to it I think i think I think you're you're right and I and I think to the point that i i was sort of trying to lead to the position is maybe a little bit more nuanced than it used to be and there is there is a reality that there is bifurcation in in the world order now and and there's the G7 which is generally aligned but there's a lot of other jurisdictions out there. So I think you're starting to see now increasingly in parlance the parallel fleet, which is a less loaded expression. Whilst it's a less loaded expression, the threats or the risks of G7 service providers engaging with the parallel fleet are not diminished because of that different terminology, but it's a recognition that there are different stances that one can take on the Russia-Ukraine conflict and trying to be deferential to that to an extent.
Nick: Okay. Well, thanks for that. And you raised the point about some interesting legal cases, and you're right. Thank you for that, because in fact, I think it is going to be a relatively interesting year in 2025 in the development of some. Practical and relevant legal cases going through the courts in England. And as you know, 2023 and 2024 were busy years. In the Supreme Court in the UK here last year, we had MUR and RTI, which essentially about the operation of a Charter Party force majeure clause in a sanctions context, which you'll be very familiar with. Another case called the Giant Ace, the FinBank case, which clarified a question that had never really been properly answered in English shipping law for some decades about the application of the one-year time bar, the crucial one-year time bar under the Hague-Visby rules for claims for cargo misdelivery which occurs after discharge and the answer to that was previously not clear. So I think 2025 is also set to be busy. I've only picked out two examples in the interest of time and brevity. One is a drier, more contractual case, and one is prevalent in the wet and the sort of admiralty casualty field. The first is that just before the end of 2024, there was quite a significant new case in the commercial court, the first layer of court we have here in the UK, between Hapag-Lloyd v Skyros. As owners in relation to the assessment of damages following the late re-delivery of two ships under TC's, where under the terms of separate MOAs signed with third-party buyers by the owners to sell the vessels, the owners couldn't charter the vessels and earn higher after the late re-delivery. Okay. Why is it interesting? Well, the court in that case awarded the owners only token damages, nominal damages, so virtually nothing, instead of market-based damages for the period of the overrun. In other words, the period of the delayed delivery. And that has been, and usually is, the normal measure because it is seen as a loss of opportunity for the owners to take advantage of the rising market, which he is shut out of because the ships in breach of charter were redelivered late to him. The difference here was that the court, Robert Bright, Mr. Justice Bright to me, said that even though the charters were in breach by redelivering late, because the owners were going to sell the vessels and were bound to sell the vessels to someone else, they did not, in fact lose an opportunity to make money in a rising market during the overrun period because they were going to sell them and they wouldn't have chartered them out. So there was no actual loss. And so the award of nominal token amount followed from that. Now, all of that might sound obvious, but it arguably goes against quite a fundamental rule in this area that owners can recover in a rising market the difference between the charter rate and the market rate for that overrun period, whatever they do with the vessel. But as here and as always, facts will be important and were important. And what's interesting, I think, for 2025 is that this case, essentially the invitation of the commercial court judge himself, looks like it's heading to the Court of Appeal later this year, where a number of really fundamental issues about market-based damages will, I think, be analysed in greater depth. That's the first case the second one is the now very long-running MSC Flaminia case and that's being heard by the supreme court this year on the 5th of February people listening may recall that this was a container vessel chartered by its owners conti to MSC which unfortunately suffered an explosion a large-scale fire back in 2012 caused by auto polymerization of a chemicals cargo. Inevitably, plenty of legal battles have followed. But specifically in this case, the ship owner started arbitration in London under the time charter against MSC to recover all its costs following the incident, plus lost hire during the repairs and various other heads of damage, which it won to the tune of some $200 million. Unsurprisingly, after that, MSC applied to the English court to limit their liability for damages payable to the owners under the 1976 Limitation Convention. People will know from maritime law, both in England and elsewhere, that that enables owners and a class of people involved in the ownership and charging of a vessel to limit their liability for maritime claims following an incident of this nature. Their liability would have been limited to 28 million sterling, in fact. So a small, very small portion of the $200 million damages award that had been made against them. And that was on the basis that the liability fell within a much-argued-about provision of the Limitation Convention 21A. And what that attempts to do is define the claims which can be limited. And back in 2004 some 20 21 years ago a case called the CMA CGM Jakarta had decided that it only applies to claims for loss of and damage to property other than the ship and consequential loss arising from that but not to the ship itself and MSC said that their liability the owners wasn't for damage caused by the ship but for damage caused by the exploding cargo which is not a ship. So therefore it could be limited under T1A. And the effect of that would have been that the charters could limit their exposure to an owner's claim for the owner's own losses, rather than losses suffered by what they called in the case outsiders or third parties. Well, the commercial court and then the court of appeal disagreed with that, albeit for slightly different reasons in the Court of Appeal, so the MSC could not limit their liability. But the Supreme Court will now hear that case in the coming weeks. And it's fairly rare for this area of maritime law, which is relevant, I should say, in quite a few ongoing limitation actions in the English Admiralty Court, the Maersk, the Ever Given arising out of the blockage of the Suez Canal in 2021. It's quite rare for this kind of case to get to the Court of Appeal, let alone to the Supreme Court. But that is what's happening with the MSC Flaminia. So that will be watched very keenly by quite a few people. So, those are just two examples, Alex, across the whole spectrum of shipping, really, to look out for in 2025.
Alex: Yeah, thanks, Nick. And it's clearly going to be a fascinating year ahead, at least for you and I. And I hope for our listeners as well, a lot to look out for there. Look, I'm mindful, you know, you and I could continue talking about this stuff forever. And I think that's probably not a bad place to bring this podcast to an end. We will obviously have to see what 2025 has in store we certainly live in interesting times so I think all that's left for me to say is thank you to our audience for listening I hope very much you found our insights interesting and helpful you know if if anything that we've said is has provoked further thoughts then please do get in touch with myself or Nick or indeed your usual contact to Reed Smith and happy to talk further about any of these issues and indeed others so um And in the meantime, take care.
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Drones can deliver goods faster, cheaper and more sustainably than traditional methods. But how are they shaping the global supply market and what are the benefits and challenges of using them? Reed Smith partners Laura-May Scott and Gregory Speier discuss the current state and future trends of the drone delivery market, the key drivers and barriers of its growth, and the legal and regulatory implications of this emerging industry.
This podcast is part of the From A2B: Decoding the global supply chain series, where Reed Smith lawyers share insights on the latest developments and issues affecting the transportation sector.
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Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Laura-May: Hello and welcome to the Reed Smith podcast channel, Trading Straits. My name is Laura-May Scott, and I'm a disputes partner at Reed Smith, working out of London.
Gregory: And I am Greg Speier, a partner in the transportation industry group at Reed Smith, working out of our Princeton, New Jersey office. Today, we will be exploring how technology and innovation are transforming the world of logistics and transportation. Specifically, we will talk about one of the most exciting and also controversial developments in the delivery industry; drones.
Laura-May: So drones, or unmanned aerial vehicles, are flying machines that can be remotely controlled or programmed to perform certain tasks, such as surveillance, photography, or delivery. In recent years, drones have been increasingly used by couriers and e-commerce companies to deliver goods faster, cheaper, and often more sustainably than traditional methods. Today, we will uncover how drones are shaping the global supply market and what the benefits and challenges are of using them.
Gregory: Yep, that's true. And we definitely have a lot to get through today. And it's really fascinating to see how drones are transforming the delivery industry overall. And, you know, this is all new. You know, the drone delivery market is still very new. It's in its infancy, but it's growing so fast. It's growing rapidly. And according to a 2023 study conducted by market research platform, Markets and Markets, the current state of global drone logistics and transportation is expected to reach $16.1 billion, that's US dollars, by 2030. So in about five years, it's going to be a $16.1 billion industry. And that's up from not even $1 billion last year.
Laura-May: Yeah, I mean, that's a compound annual growth rate of over 50%. It's huge.
Gregory: Yep, absolutely. Huge is right. And so what is the main driver behind this growth? It's cheaper, there's more convenient delivery market options, especially in certain industries. Think about e-commerce, healthcare, agriculture, mining. You have all of these industries that are demanding, you know, cheaper, faster, more convenient delivery market options. And then also that's coupled with technological advancements, the hardware, the software, the infrastructure, and all of the largest players right now, the big ticket retailers, they all want to be delivering products by drone, and many are already doing so.
Laura-May: Exactly that. And as a result of that growth, we're seeing key trends coming out of the market. And I'd have to say that the first and most obvious one to me is the development of more sophisticated and autonomous drones as we see the technology develop in the way that you've described, Greg. There's the integration of other drones with other modes of transportation, such as trucks, trains, or ships working together with drones to deliver things. And obviously, there's also the emergence of new business models and regulations that enable and support drone delivery.
Gregory: Absolutely. And from the customer point of view, also, the drones can deliver products faster, cheaper, more convenient delivery options. And think about all the time sensitive and urgent products that could be delivered to remote areas or much more quickly, medicine, food, electronics, urgent items that customers need. Those could all be delivered by drone.
Laura-May: Yeah, and they offer that flexibility and personalization because customers can choose when and where they want to receive their packages and often can track that delivery in real time. So for the couriers themselves, the companies, obviously drones can offer lower operational costs than some of the other more traditional methods of transportation and delivery. And, you know, they can create higher efficiencies, higher customer satisfaction if obviously the job is done correctly. And they can often reduce fuel consumption, labor costs, vehicle maintenance, and avoid traffic jams and road accidents and theft, et cetera. There are so many benefits.
Gregory: That's so true. And another big issue where there's another benefit of drone operations, sustainability. Delivery can reduce the carbon footprint. I mean, just driving down the highway around where I live, you just see trucks and trucks of big retailers. And so if we're able to reduce some of that traffic or customers driving to and from pharmacies or the big box retailers to have so much less pollution and cars and trucks on the road, the impact is potentially huge.
Laura-May: Totally. They also offer, I guess, something, just stepping back slightly, which is the wider social and environmental benefits. They can save lives by delivering life-saving supplies, as you said, such as medicine, vaccines, to rural health facilities, or even to war zones, where there's a significant issue in accessing the land, and drones can get in there and do that more efficiently and safely than any other mode of transport.
Gregory: Yeah, good point. War zones, very timely as well. So that's definitely a great point. Another benefit of drone operations, they will, from my perspective, create jobs, employing drone operators, technicians, entrepreneurs, all who can leverage drones to offer new services or products. So drones could have a positive impact on many aspects of not only the environment, but society as well.
Laura-May: I totally agree. So we're espousing all the virtues of drones, but we should flag also that there are obviously several challenges and risks that drone delivery face, especially as it's an emerging market. And those can be both technical and non-technical.
Gregory: Yeah, it's really important we discuss that. On the technical side, there are challenges. Reliability, safety, and security. Drones, like any product, it can malfunction, crash, be hacked. There could be damage caused to person, property, injury, theft. There are also airspace concerns to ensure drones are not crashing into other drones or drones are not interfering with the airspace of other operations that are out there. And then the potential of nuisance claims. We've already seen a few filed in the U.S. With the interference of drones and the sound and how they interfere. And if you look up to the sky and all of a sudden there's drones interfering with the ground rights of your property. So these are all things that from the U.S. side, the FAA is considering. They are rolling out different blueprints and regulatory frameworks. And they'll continue to do so as drone operations increase and evolve. And we'll talk about it a little bit later. Technology is constantly improving. So there are solutions in terms of having more robust and resilient drones. And then coupled with the implementation of strict quality and safety standards, I really do think that the drone space is ready to take off.
Laura-May: Yeah, I agree. You mentioned airspace, Greg, which is absolutely a concern. And I guess the key issue there that you touched on is that we have to ensure that drones integrate in the right way with the existing traffic management system, because drones can interfere with other aircraft, planes, helicopters, balloons, and cause collisions or delays. And I think as we see more drones emerge over time, we will have to manage that more carefully.
Gregory: Yeah, no doubt about that. And kind of what I see as some solutions to this are, we need the development of a dedicated and coordinated drone traffic management system, but also the establishment of clear and consistent rules and regulations. And there has to be all along the way collaboration with various stakeholders, obviously the government and regulators, but also the airlines and drone operators. And one thing that is noteworthy and worth mentioning is that over the summer in Dallas, Texas. Zipline International and Wing Aviation, they were permitted by the FAA, the Federal Aviation Administration, to deliver packages to customers via drone beyond visual line of sight. BVLS is how we refer to that. And that means that the operators are able to operate these drones so far that they cannot see them. And that's really incredible and is a huge advancement from the U.S. point of view. And these drones were able to do that due to technology, an advancement known as UTM, or Unmanned Aircraft System Traffic Management. And so with UTM, there's a cooperative interaction between drone operators, service providers, and the FAA to make sure that there's real-time communication. And so despite this technology, I've been in the business for a long time, it is inevitable that, unfortunately, that there probably will be a crash of some kind occur that is significant and noteworthy, causing significant injury to people, property, or both.
Laura-May: Yeah, and I guess those using drones will want to off-board some of that risk, some of that accident risk, and I certainly think that's where insurance can help. So as of 2024, in the UK, we've implemented a comprehensive set of drone laws regulated by the Civil Aviation Authority to ensure the safe and responsible operation of drones to avoid those sorts of issues that you've identified, Greg. And the CAA here in the UK regulates drone usage together with the local authorities who may have specific requirements or rules for drone flights within their jurisdiction. And in addition to that, there are sometimes local bylaws that can regulate particular restricted airspaces.
Gregory: Yeah. So, I mean, that makes me think, like in your view, Laura-May, does the insurance you need depend on the size of your drone and what you are using it for?
Laura-May: Yes, exactly that. So in short, if you fly a drone that weighs less than 20 kilograms for fun, you know, as a sports or as a hobby, then you can choose whether or not you have insurance. But if the drone is over 20 kg, then you do need insurance. And certainly if you use it for work or business purposes, then you need insurance.
Gregory: Okay, so the CAA requires commercial drone operators to hold a quote-unquote adequate level of insurance, which that includes public liability and aviation-specific liability?
Laura-May: Yes, yes, Greg, that's it. So public liability insurance needs to be compliant with EC Regulation 785 of 2004, and that regulation applies to all air carriers and to all aircraft operators flying within into out of all over the territory of a member state to which the treaty applies and the UK is caught within that. And according to that regulation a drone operator must purchase at least 750,000 special drawing rights. SDRs they're often referred to. And that's when they're operating an aircraft of up to 500 kg so those SDRs are effectively just supplementary foreign exchange reserve assets they're defined and maintained by the international monetary fund. I think at this time, 750,000 special drawing rights equates to around just under 770,000 pounds, British pounds. But insurers effectively write the cover on a minimum coverage basis. So that means at all times, the insured will be covered for the equivalent of 750,000 SDRs. And that allows for any currency fluctuations that exist in relation to the denominated policy currency agency that's chosen. So as a drone operator, you'll always want to know that you're covered at least to the minimum amount required by regulation. And that's how the insurance is written.
Gregory: Oh, wow. All right. So but what happens if you fail to comply?
Laura-May: Well, failure to comply with the regulation can result in fines or revocation of permissions to fly within the UK and the EU. So they are pretty severe. And I should note that the position in the U.S. and obviously globally is different. There is no one answer to drone regulations and particularly in the U.S. As it's such a large land it really varies depending on the type, purpose, location and operation of the drone. But the FFA as you mentioned Greg is the main authority that regulates the airspace and therefore the use of drones within the U.S. And the FFA has different rules and requirements again depending on whether it's recreational or commercial or public or educational drone use. And they also set out rules in relation to how you should register and certify and safely use your drone. I think other federal, state and local authorities may also have their own laws and regulations regarding drone use too. If any of our listeners want to understand more about the rules in the US, then please do reach out to us. And a good starting place in terms of resources is the Know Before You Fly campaign that was issued by the FAA together with other drone organizations. And in that campaign, there are lots of tips, best practices and FAQs for drone operators. It's a great place to start before you seek legal counsel.
Gregory: Yeah. And if we just pause here for a second, it makes me realize in real time that this is a lot of information that drone operators would want to get familiar with before attempting that first drone delivery.
Laura-May: Totally. In reality, commercial drone operators will want wider reaching insurance cover than what is required by the local regulation, I'm sure. Because one of the purposes of insurance is obviously to off-board risk and the scope of insurance available for drones in the market is wide. So you could include, for example, accidental damage insurance within your drone insurance policy. And that would come in handy, obviously, if the drone crashes, the insurance would cover the cost of repairing or replacing the drone if it's accidentally damaged. You can also get theft insurance, and that might be a prudent investment where people find ways to intercept drones and use them for illegal activity. No doubt as the market grows, we'll begin to see more of that. Another insurance that's often included is flyaway insurance.
Gregory: Flyaway insurance? I'm not so familiar with that. Could you talk a little bit more about that?
Laura-May: Of course. So flyaway insurance provides cover if your drone is lost due to flyaway. And that occurs when your drone suddenly loses contact with the controller and flies away uncontrollably. Sounds slightly scary, I guess. And you'd hope it wouldn't happen very often. But if you're a commercial drone operator, that's key that you know where your drone is. And that insurance gives you that comfort in the event that something happens. I'd say with all of this, as a commercial drone operator, you must liaise with a lawyer to find out what the requirements are under the local law in your area. And then sit down with your broker to discuss bespoke insurance cover and what's available in your local insurance market. Because as I say, things are emerging and the cost, for example, of commercial drone insurance will totally depend on a variety of factors such as where is the drone being used? What level of cover is required, what's the intended use of the drone. You really need to explain everything so that insurers understand what risk they are being expected to cover.
Gregory: All right. Very interesting. And so in your view and in your expertise, do you think that the insurance requirements and scope of coverage available will develop and expand as the technology does?
Laura-May: Yeah, I think the insurance market is in its infancy in the way that the drone market is at the moment, the products being offered by insurers will evolve as the market does. I guess moving on, Greg, it would be remiss of us not to mention some of those non-technical challenges that we mentioned earlier. I think most we can say are related to social, ethical, legal implications of drones, because as you've said earlier in this podcast, drones can raise concerns about privacy, noise, nuisance or liability among the public, the customers or the local authorities.
Gregory: Yeah, I think some of the solutions are education and awareness to the benefits and risks of drones. And I believe that the FAA is doing a good job putting out various campaigns, the Know Before You Fly campaign, for instance, and getting everyone, the public in our country, getting comfortable with drones. And so that includes the creation and enforcement of fair and transparent policies and laws. Another non-technical challenge is the economic and financial viability of drones. So for all the benefits that we see that drones could play for our society and economy, there's also some opposition to the market. They could see drones as disruptive, unfair, or unprofitable, especially in some established or regulated markets. So I do think the future of drone delivery is bright, no doubt about that, but it is also uncertain.
Laura-May: Agreed. I think the market will continue to grow and diversify, as we've said, and more companies and industries will begin to adopt and experiment with drones. and more customers and regions will demand and benefit from drones too. They will want to see that efficient delivery, for example, of an item that they've ordered online. I think we're also agreed, Greg, that the market will continue to innovate and integrate. We haven't seen the end of innovation in terms of technological advancements for drones. And as more technologies and platforms enable and support drones, we'll see more modes and networks that complement the use of drones.
Gregory: Yeah, definitely. And I think the market will also face some uncertainties and disruptions as regulations and policies affect and shape drones and as risks, various threats challenge drone operations. And one such risk is with respect to product liability related issues and legal issues in the US. And one issue that comes to mind right now is federal preemption. So a lot of state and local governments are passing laws about drone operations, about when they could fly, how high they could fly, all different things trying to control operations of drones. But the question then becomes, what happens when those laws conflict, either expressly or implicitly, with laws passed and regulations that are federal in nature? So that's where federal preemption comes in. Will states have any power to enact laws that are in any way counter to federal laws governing drones? So the courts are just beginning to sort all that out. A second issue involves a recent Supreme Court. The U.S. Supreme Court came out earlier this year with a significant decision, the Loper-Bright Enterprises decision, where the Supreme Court overturned Chevron deference and they upended 40 years of administrative law precedent. So another question that comes to mind for me is an open question of how courts across the country are going to deal with the deep regulatory body of laws and regulations governing flight in the US. How are courts going to view those going forward in light of the Loper Bright decision?
Laura-May: Yeah, totally. I mean, there's so much to grapple with there. What about from a product liability viewpoint, Greg?
Gregory: Yeah, from a product liability viewpoint, manufacturers, they should take note. So FAA regulations and standards, those are all great. So for a manufacturer to say, well, I complied with an FAA standard or regulation, that by itself is not dispositive in a future litigation. Should your product cause injury or damage to a person or property. So at a trial, you could no doubt tell a jury that, hey, my product complied with these FAA regulations. But that's not the question that the jury ultimately has to grapple with. The jury will have to conduct various tests, a risk versus utility test, or in other jurisdictions, what's known as a consumer expectations test to determine whether or not a product manufacturer should be found liable for a potentially or allegedly defective product. And under a product defect cause of action, there are three different prongs that a plaintiff could pursue. Those are defective design. Defective design means that there's some flaw in the way of the engineering design of the product that resulted in the project failing and causing injury in some way. There's defective manufacture. The manufacturing defect means that the product came off of the line differently manufactured than the rest of them, that it's not a specification. And because of that defect, there was some problem that caused injury or damage. And the third is failure to warn or instruct. So this is a big one, I think, in an emerging market, such as the drone delivery market. So for instance, if a drone or if it's alleged that a drone does not come with adequate warnings or instructions about the proper use, maintenance or risks about that operation, and this leads to harm, the manufacturer, the designer, or even the seller in some instances may be liable for damages. So, and we also talked about nuisance claims before as well. So, and then the last potential liability for a manufacturer. A designer or a seller is a breach of warranty claim. So a breach of warranty claim is the allegation if a drone does not perform as promised or expected and that it's not delivering the features and quality and durability that are advertised, that could result in a potential claim against a manufacturer, a seller, or a designer. So I'm telling you, there's really no shortage of legal issues on the horizon in the US as it concerns drones. Insurance, as you talked about, is key, and consulting with legal counsel is imperative.
Laura-May: I totally agree. Better to be safe than sorry, especially where this tech is so new. Despite the risks we've outlined, the use of drones is an exciting technology. I think we agree with each other there. And it will continue to transform the global supply chain as time goes on. The drone market will not only deliver goods, but it would also deliver value and impact as drones evolve to support different industries commercially and contribute generally to some of those social and environmental things that we've talked about.
Gregory: Yeah, absolutely. And my prediction is that drone delivery will continue to expand. And our recommendation is that drone delivery stakeholders, they should watch carefully as the laws and regulatory pictures relating to drones develops. And there's no doubt that it will.
Laura-May: And it sounds like then that we're going to be about to do a part two of this episode in a year's time, Greg.
Gregory: Yeah, that's the deal. That's the deal. Well, thank you so much, Laura May. It was really, really nice talking with you about this topic. And thank you to the listeners for tuning in.
Laura-May: Yes, thank you. And if you enjoyed this episode, then please do subscribe, rate, and review us on your favorite podcast platform. And please do share your thoughts with Greg and I and feedback to us on our social media channels.
Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's energy and natural resources or transportation practices, please email tradingstraits@reedsmith.com. You can find our podcast on podcast streaming platforms, reedsmith.com, and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
Reed Smith associates Emma Weeden and Charles Sauvage explore the impact of the Consortia Block Exemption Regulation's (CBER) expiry on the liner shipping industry and evaluate the potential of the Specialization Block Exemption Regulation (SBER) as a replacement. They also discuss the resulting changes, including legal adjustments, compliance considerations and the future landscape for competition, innovation and sustainability.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Emma: Welcome to the Trading Straits podcast. Today, me Emma Weeden and my colleague Charles Sauvage from Reed Smith's London and Brussels office will be talking to you about the consortia block exemption regulation. So the Consortia Block Exemption Regulation actually expired in April and it applied to container shipping lines to allow them to collaborate on space and their sailings. Today we're going to be talking about the implications of that law expiring and how shipping consortia will work going forward. So to start off with, we should talk a little bit about what shipping consortia are. These are shipping lines that jointly cooperate in the provision of container services. These cooperations are in respect of sharing space on vessels. This can be done through highly integrated consortia using vessel sharing agreements or simply by slot charter agreements. This is exchanging slots on vessels. The features of consortia are that they share capacity to create regular weekly sailings for each line's clients. Where consortia cooperate across trades, these are known as alliances. It's important to note that these aren't conferences. So shipping conferences were abolished in 2008 and these allowed lines to collaborate on price and capacity. Here we're talking about collaborations in relation to capacity only. Today, the consortia that are often talked about are the large East-West alliances. Here, most of the world's top 10 lines participate in one of three alliances, the Alliance, 2M, and the Ocean Alliance. However, there are a lot more consortia than just these three alliances. These big alliances are famous because they operate on the world's largest trades. However, it's important to remember that there are other small consortia and alliances. They operate north-south and they operate regionally. In the Med, for example, there are lots of smaller lines operating in consortia and they shouldn't be forgotten. So what did the consortia block exemption do? So a good place to start is what are block exemptions? So block exemptions allow businesses to carry out and collaborate on activities that would usually be caught by competition law. So what did the consortia block exemption let lines do? So this regulation was introduced in 1995 and renewed in 2014 and 2020. And it specifically allows shipping liner companies to form consortia and operate a joint service on vessels and share port facilities under certain conditions so the main condition in this was that the lines together wouldn't have a market share of over 30 percent and the period of the agreement and lock-in had to be limited the agreement also had to not have any hardcore restrictions you can't do things like price fix or market share and and it's also worth noting that when the UK left the European Union it adopted the consortia block exemption regulation. The benefits of this law were that it facilitated these consortia by making the competition or assessment easier there was a regulation that laid down what lines could do this created legal certainty reduced risk reduced legal costs it was it's a straightforward assessment for shipping lines do they fit within these rules. The big benefit of this law is that it allowed lines to join up to provide ships and regular services. This has meant that you know if one line buys a big big ship it's got other partners that can fill space on this ship, so with the consortium you can fill the space have a regular sailing. You know the goods that are transported by a container often have to be there you know just just in time it's a different industry to to tramp shipping so being able to collaborate together to have one weekly sailing is a good thing for for shippers. It's also helped with environmental protection so if you've got one ship sailing rather than four ships sailing at the same time you know that reduces carbon emissions. The vessel utilization of a big ship can also be higher so you're not sailing more half empty ships. So Charles it'd be good to know your thoughts on why the consortia block exemption regulation was abolished.
Charles: Thank you, Emma. Yeah, the CBER, in relation to why was the CBER abolished, it's important to note first that the CBER was one of the very few sector-specific block exemption regulations that were adopted in the EU. Unfortunately, the EU Commission has adopted, has moved towards getting rid of these sector-specific exemptions. And even though we continually and regularly advised in favor of maintaining the maritime, the CBER, as the sector-specific block exemption regulation for the shipping sector, we have not been heard, and we had argued that because the shipping sector was, in our view, very specific, was very international by nature, and was very high cost, and therefore needed its own legislation. Fortunately, as I said, and as Emma explained, the sewer was drawn and now the only sector-specific block exemption regulation left in the EU is the one relevant to the motor vehicle sector. This move of the EU Commission was not a given, in particular because other jurisdictions have and continue to have sector-specific block exemption regulation in the maritime sector. For instance, Hong Kong, Singapore, and Israel. And the U.S. Have a slightly different system, but in a way even more constraining because in the U.S. you have even a sector regulator, the U.S. Federal Maritime Commission, to which shipping lines must not only file the agreements they enter into, but also submit information such as their meeting minutes and other documents in order to allow the Federal Maritime Commissions to perform real-time monitoring of the maritime sector. So, yeah, the CBER in the EU was withdrawn and the same in the UK. And this is somewhat confusing, in particular because the market conditions haven't changed drastically since the last time it was renewed. For a while, the Commission considered that the shipping rates had increased, But given that they have now, since the end of the COVID-19 pandemic, fall down again, that was not found to be a good reason. The Commission also thought that the quality and reliability of services have remained since 2014. So really, the reasons for underlying the withdrawal of the CBER are yet to be determined. The Commission also considered that it wasn't clear whether a consortia could deliver sufficient consumer benefits to justify renewal. And it also queried the indispensability of having the consortia for achieving the standards required by Article 101.3 of the Treaty on the Functioning of the European Union, and in particular, the efficiencies bringing consumer benefits. But maybe in order to better understand why the expiry of the CBER will happen, why was it decided, and how it will have negative consequences, it's important to further explore the reasons underlying the EU Commission's decision to withdraw it. Maybe the first one I briefly touched on is the inconsistency in looking at the effects of the COVID-19 pandemic. So as I said, for a while, the Commission, during the pandemic, we could observe that the freight rates had increased, but evidence since suggests that these are now falling. So in its review of the specialization block exemption regulation in 2021, the Commission considered, in line with what I've just said, that the effects of the pandemic were temporary and therefore did not cause reason for concern. And yet, conversely, a year later, during its review of the CBER, the Commission focused on the adverse effects of the pandemic on fright rates and deemed it as a good reason for the CBER to expire as no longer being fit for purpose. This inconsistent approach really is a cause of concern. We also noticed that the Commission for sure underestimated the legal uncertainty and the compliance costs that the expiry of the CBER will entail for carriers. And this, even though we highlighted it several times in the consultations that were carried out in the context of the CBER review. So we'll come back to this, but as a result of the withdrawal of the CBER, carriers will now have to self-assess their cooperation agreements using the specialization block exemption regulation, which, amongst other reasons, which is not sector-specific and which will therefore increase the compliance costs. Not only because the shipper carriers will now have to familiarize themselves with this complex new sectoral new regulation, but because also precisely it is not sector-specific. And there is no, in parallel to the SBER, there is no longer any sector-specific guidance. And finally, another reason is probably is that the commission failed to properly consider the negative impacts of the expiry of the CBER on competition, innovation, and sustainability in the liner shipping sector. Indeed, there's a chance that consortia will be replaced by less efficient and environmentally friendly standalone services, or by more integrated forms of cooperation, such as mergers, which could harm competition by making the market highly concentrated. This may result in competitors outside these mergers and other concentrated markets struggling to compete, thereby having the knock-on effect of slowing technology innovation. So really, we believe that the expiry of the CBER will have a lot of negative consequences for the line of shipping industry, including in line with these justifications, which in our view were really not conclusive, greater legal uncertainty. Increased compliance costs, and reduce competition, innovation, and sustainability. Now that the CBER is abolished and that we have covered the reason why this was the reason why, we can wonder what happens now. And actually, the expiry of the CBER does not mean the abolition of consortia. So it's not because the CBER is withdrawn that the consortia are forbidden. It only means less legal certainty. How is that? The thing is that, as I've said before, the consortia agreements will now need to be self-assessed because there's no longer a piece of EU legislation granting automatic, hence the block in block exemption regulation, giving automatic exemption, what we also sometimes call the safe harbor to the agreements. The carriers and parties to these agreements will have to carry out an Article 101(3) assessment. And amongst this is comprised of four conditions, amongst which is showing the benefit of the consortia in the form of efficiencies and including the benefits to customers of the consortia. And this will need to be clearly laid out while any restrictions will need to be justified and the fact that competition in the market remains willing to be shown. So this is obviously more work to consortia members. Again, because we lose with the CBER, we lose the automaticity that was allowed by it. And well, it is true that some of the big alliances were already carrying out self-assessments because on some of the trades, the alliances market shares were above the 30% threshold that was contained in the CBER. However, for small lines and smaller control shares, this is much more work. So the Commission and the CMA have said that the specialization block exemption regulation will be a suitable non-sector-specific replacement. But that is yet to be seen. And actually, Emma, maybe you can tell us more on how is it that the SBER will be a suitable replacement to the CBER?
Emma: As you've said, the CBER isn't a sector-specific solution. Rather, it exempts certain horizontal agreements from the prohibition that's in competition law. So it's about specialization agreements generally. It's not about the shipping industry. The reason that we've been looking at this in relation to consortia is that from the Commission's consultation on the consortia block exemption is that they've said it provides a suitable alternative. We think this is questionable. So our findings are that this assertion quite lacks clarity. So there's an assertion that it can apply to services. Predominantly, the specialization block exemption has been used in agricultural construction, there's no precedence on this legislation being used in the transport industry and as we've talked about before the transport industry is special you know it's unusually international so despite the commission saying that consortia should rely on the specialization block exemption they haven't provided any additional guidance on this so the consortia block exemption outlined specific activities necessary for the consortium's operations. Article 4 was all about what could be done but the specialization block exemption is silent on this. So you know it was about how consortia could work was in that legislation. So the fact that you could do joint procurement reports specific details like that. You know, this causes complexities for the carriers. So they are used to having specific guidelines. They don't know now whether their activities are exempted or not, and each of them will need to be, each activity will need to be looked at specifically. You know, activities like a green ports will call just things that a shipping consortia will do all the time and was clearly laid out to them in the previous legislation. As I just mentioned, the specialization exemption doesn't look at the particulars about this industry. So there's high fixed costs and volatility and demand. There's a need for frequent adjustments to capacity, to trade routes. There's an environmental impact that needs to be looked at specifically. So we had a piece of legislation that was designed to address the peculiarity of this sector. And so there could be operational cooperation and that could lead to economies of scale, better use of vessel capacity, regular savings, environmental efficiencies. And that is now gone with non-sector specific information. So the Commission has recognised that container services can be preparation services to make it full within this law. But in the UK, that guidance hasn't been as clear. So they've looked it on the basis that it can apply to joint distribution and we don't think container services are joint distributing container lines, when they form a shipping consortia, they're not jointly distributing. They're allocating spaces on vessels to serve their own singular customer. So problems with the specialization block exemption is, you know, it doesn't address the issues kind of in the market and what's happening. We've got a kind of long list of differences between the UK and the EU here. So the consortia block exemption was obviously very international. The specialization block exemption is way more domestic orientated. So the market share threshold in both pieces of legislation is different in the consortia block exemption you could use this piece of legislation if you had a 30% market share and what was great about the consortia block exemption is that it told you how to calculate your market share based on volumes and how to calculate the volumes of your whole consortia by looking at your consortia partners, volumes whether carried in another consortia, your consortia, or independently, so we had lots of guidance on how to deal with market share here. The market share thresholds are lower, it's 20%, so this means less consortia would fit into this. So that makes it you know I guess less useful because less people can like slightly bigger consortia can't use it, so we need to self-serve. So the hardcore restrictions in the consortia block exemption, like the big one is the party's never discussed pricing and market sharing. You have your own customers, you do your own sales, you do your marketing. In the specialization block exemption, there obviously are hardcore restrictions, which you can't do. But there is the possibility of joint pricing here in a more limited way and joint distribution is allowed under it. So it's slightly, slightly different. We don't know really how that would fit with shipping consortia yet. So I think if we come on to how it's been dealt with in the UK differently to how it's been dealt with in Europe. So the Commission have clearly said that we should be looking at this new law. The CMA have also mentioned it. However they've been less clear on its application to services instead of joint distribution so we don't know whether how applicable this is actually going to be in the UK to shipping consortia we haven't managed to get any more guidance from the CMA on that but time time will tell. You know the UK have followed Europe in getting rid of the consortia block exemption so So at the start of the consultation process, the CMA came out with quite bold support for the Consortium Block Exemption Regulation renewing it. So it was very positive. Then Europe made the decision not to renew. The CMA seemed to just follow that, which is quite interesting. So we think from that the UK is going to follow the EU despite it being kind of a bit more unclear about how the specialization block exemption applies to shipping consortia and their point on joint distribution which we don't think works and was different to the European guidance on it so I think we need to watch this space. Charles can you see any advantages in using the specialization block exemption, rather than the consortia block exemption?
Charles: There is one. It was interesting to hear about the comparison between the CBER and the SBER and the UK equivalent. Indeed, there is one advantage to the Specialization Block Exemption Regulation. It lies in the fact that the latter does not contain any provision on notice or locking period. Indeed, while Article 6 of the CBER was foreseeing the right to withdraw from consortia and allowing it to subject it to a maximum period of notice as well as a lock-in period. The Specialization Block Exemption Regulation, on the other hand, provides nothing on that front. Therefore, it's possible that perhaps where a maximum of six months notice period were allowed with possibility to extend it to 24 months after a maximum initial period, what we call not a lock-in period for 36 months. Leading the whole to a maximum of five-year lock-in. It's possible that under the CBER, the longer periods, longer than five years will be allowed. But that will depend on whether this will be justified or not, will depend on the level of investment and the type of agreement. So actually, even though this is a possible advantage of the specialization block exemption regulation, it is yet to be seen if that will be allowed. Interestingly, the situation is the same in the UK because specialization agreement block exemption order also does not have any duration or locking period provisions. But now that we've covered all the aspects of the CBER and SBER, maybe Emma, you can tell us a bit more about what will the situation be going forward.
Emma: So the change in legislation, there's a changing landscape for consortia as well. So in the market, we can see the world's two biggest lines are separating in their alliance and new alliances in 2025 we expect to form. We would be advising our clients that they need to self-assess. There's a lack of legal certainty. So all consortia and alliance agreements should be self-assessed, however big or small. We've also seen in other sectors that after block exemptions are not renewed or repealed then they there can be investigations by sector regulators and you know the commission so and you know self-assessments should should be done. I think this is the end of the the podcast so thank you for listening to Trading Straits today. If you've got any questions for Charles Sauvage or me, Emma Weeden, we'd be really pleased to hear from you.
Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith’s Energy and Natural Resources or Transportation practices, please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
In part 1 of the series, partner Philip Thomas and associate Voirrey Davies highlighted the importance of cybersecurity in shipping. In part 2, they share tips on how to handle a breach, and provide their thoughts on the future of autonomous shipping.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Voirrey: Welcome back to Trading Straits. My name is Voirrey Davies and I am an associate in our transportation industry group based in our London office. I am joined once again today by Philip Thomas, partner in our emerging tech team, also based out of London. And this is our second podcast in our two-part series on shipping and cybersecurity. Just as a brief recap of our last podcast we thought it would be helpful just to go over again the definition of what cybersecurity actually is in the context of what we're talking about so cybersecurity is the steps taken by an organization both with regards to people and technology to prevent cyber attacks from occurring or to minimize their effect and as we talked about in our last podcast this differs from a data breach in various ways which we won't go into again but please feel free to listen to our podcast from last time if you want some more information on that. Our key takeaways from the last podcast were that it's just vital to be prepared ahead of time. You don't want to be dealing with a breach with nothing in place. People are often the weak link in any sector not just within transportation but any industry area and it's not because people seek to act maliciously it's just because hostile parties tend to target people so this is why training and robust policies for everybody in your team which includes people working as we would say at the pointy end so on the ships or driving the planes is of utmost importance and today what we're going to talk about is what happens when, despite all your best efforts, the most robust of policies, there has been a cyber attack and a corresponding cyber breach. I think really what the difficulty is, is trying to think about a cyber attack, because it can have just as big an impact as a physical casualty, like a fire or grounding, but it can be really difficult to envisage how it can actually affect a ship or a port infrastructure or shipping company. I mean, Philip, I don't know about you, but I personally think it's quite difficult to imagine something intangible like a cyber attack.
Philip: Absolutely. So I think, I mean, cyber attacks can take very different shapes and forms. In a transportation context, they can have a significant disruptive effect. And as we mentioned on our last podcast, it can even, in some instances, be a matter of life or death, particularly where the attack involves challenges to the safety of personnel. I mean, in terms of real world consequences, there's a raft of things to take into account. First of all, there's the disruption that the incident occurs. There's a cost of remedying it. There's additional management time that could be taken up in trying to resolve it. You've got issues of reputational damage, potentially, because if you're seen to be an organization that suffers or at least is vulnerable to cyber attacks, that can impact your perception in the market. And it can also put you on the radar with regulators for all the wrong reasons. A recent example, although not a cyber attack specifically, was the CrowdStrike outage, which, as many of you will know, exposed the vulnerability of people's IT systems when you're reliant on a single service provider or a limited number of service providers. In that instance, the disruption came as a result of an update that wasn't carried out properly, but it has the same disruptive effect where systems went offline for most of a day. Airline flights were canceled, businesses were disrupted. And so that just gives a bit of a flavor of how bad it can be.
Voirrey: Yeah, I mean, I think the CrowdStrike incident was just, it was a really great example of how the world can just grind to a halt. You know with one issue with one company you know it just really got it into the news and I think you know whilst there was a lot of fears that it was a cyber attack you know to find out it was probably a bit of a relief to find out really that it was just an update that had kind of gone wrong and while you were talking there I was kind of having to think about, some more specific cyber attacks that I can think about was related to assets, so to ships or to planes. And there was a well-publicized incident just in March of this year, so only a few months ago. And there was a Royal Air Force plane carrying Grant Shapps, who was then the Defence Secretary of the UK near Russia. And they experienced a GPS-related incident where the GPS of the plane was jammed, which affects the navigation system of the plane. So it was really quite dangerous to kind of find a plane in that kind of position and you have to think about potential effects there on commercial airlines as well and this ties in you know GPS spoofing and GPS jamming are not I wouldn't say they were common instance in the shipping industry but they have definitely been increasing in the amount of attacks that have been happening. and I think we briefly kind of spoke about this in the last episode but you know there's a case that came to us and obviously I'm not going to go into details about you know parties involved but basically the GPS of our vessel, our client's vessel, had been spoofed and that meant that the ship's AIS system which essentially kind of shows where the vessel is and relies upon GPS to provide a position actually showed that the ship was on land. In fact, I think it was in a car rental shop in the middle of the nearest city. And... It resulted ultimately in a collision happening. Now, anyone who's listening to this and knows anything about collision regulations knows very well that relying on AIS for collision avoidance is not acceptable. However, it was a contributory factor to this accident happening. And it was what we would describe in the industry as a “holy cheese” moment where there had been lots of issues that had happened. It had gone through all the holes in the cheese and resulted in this collision and so whilst this incorrect GPS position was not solely causative it was a significant factor and I’d say all of these examples together we've just been discussing show that a cyber attack has a very real world consequence so you know what do you think?
Philip: I agree, I agree and I think the way you should think about cyber breaches in a shipping context is to think about it like any other casualty. I mean, you'll know from your wet shipping work that casualty can involve a grounding, collision between vessels or container fire. And it has parallels to a cyber breach because you often have a sudden dramatic incident that is fast moving. Sometimes the fact pattern changes quickly. And in both instances, you need a responsive team to help you to identify and contain the incident as well as deal with a fallout and so you know I think if organizations get to a situation where they treat cyber preparedness in the same way as they would casualty prevention then I think you're on the right track.
Voirrey: Yeah I think treating a cyber attack in the same way as any other casualty is just it's the best way of looking at it because it is a casualty it's just you know wearing a different hat to the ones that we're used to I know when I was at sea we did trainings all the time on you how to respond to a fire. You did fire drills, you did lifeboat drills, man overboard you know all those kind of what we would call I guess a “standard” marine casualties situation and you know now working here at Reed Smith you know I'm part of the casualty and admiralty team and you know the best, most efficient way of dealing with a casualty is the person on the ship, which is usually the master, calls the correct person shoreside, which is normally the designated person ashore. And that person essentially activates a shoreside emergency room. All of their relevant people will come in to start dealing with this situation. But they also call their external people and this is where for example we might get a call to go out and attend to a casualty you know we fly all around the world doing that kind of work and it's not just shipping lawyers or casualty lawyers you know with a cyber breach you need to make sure not only have you got someone that understands shipping but you've got someone that understands in great detail you know what to do with the different regulations around the world because you know my understanding Philip is fairly basic on this one but different countries have different regulations and they all require different things that you need to do as regards to reporting and I think having that expertise to hand is definitely the way to go and I think Philip off the top of my head I can think of this NIS-2 directive that's been going around but maybe you could expand a bit more on these kind of regulatory requirements.
Philip: Exactly. I mean, I think the first thing to say is that the cybersecurity regulatory landscape is very fragmented. So as you say, different laws apply in different jurisdictions, although there is some commonality in the EU, for example, and in the UK, when it comes to things like the NIS-2 directive, which will come into force fully in October of this year. You've got the Critical Entities Resilience directive, which also applies to transportation companies as they're deemed essential services. So you've got a growing landscape of laws that you need to navigate. And one of the particular concerns here is that if you're unlucky enough to suffer a major cybersecurity breach, you've not only got the fallout of that incident to address and to contain and to think about, [but] do I need to notify any regulators of the incident? But it may also put a spotlight on what you've done as an organization to comply with those regulations. What we found, certainly in a data breach context is that often some of the biggest fines that have been levied on organizations have been less about the fact that a breach occurred in the first place and more to do with the organization's lack of preparedness. Because it's when you're notifying the regulator or when the regulator finds out about it, you then have to explain what did you have in place, what policies did you have in place, what training did your staff have, what technological measures, what administrative measures, what organizational measures did you have in place, to safeguard against this risk. Are you independently certified, for example, to any industry standards on cybersecurity?
Voirrey: Yeah and I have to say that's really not that different to what shipping companies are already required to do you know under the ISM code you need to have a safety management system so you need to be able to you know say what you do which is the policies and you need to do what you say so follow the policies and then you need to be able to prove it so you need to prove that you've been doing it that's the kind of the very basic summary of what safety management system is and you know it sounds like it's basically exactly the same thing for data breaches.
Philip: Exactly and you touched on a great point which is that you know the cybersecurity impact on seaworthiness at the end of the day because if your assets are vulnerable and compromised then depending on what the shape of that cyber incident is it may impact the safety and seaworthiness of the vessel.
Voirrey: Yeah and I think you know that that very as we keep saying here real world or like kind of impact of a cyber attack you know the safety of the vessel, the cargo, and the environment you know potentially all put at risk and we did briefly kind of discuss this in the last episode but you know vessels having their GPSs or now with this advent of real-time data coming to vessels, ECDIS systems, you know, being hacked and getting false navigation data and finding yourself in the waters of a hostile state and potentially being arrested, you know, that is a serious issue for any ship owner. Because not only have you now potentially got an asset that's been arrested, you're going to be facing claims from charterers, from cargo interest you know it definitely opens a door to significant issues for the owners there if they've left themselves vulnerable.
Philip: Exactly as well as reputational risk.
Voirrey: Well absolutely I mean you don't want to be known as that ship owner whose ships keep getting hacked into and arrested. And you know I think technology is there to make things easier that's supposed to be the point but with technology and new technology just it comes with new and sometimes much more complicated risks that we don't necessarily think of straight away you know when you get the new jazzy piece of technology on your ship or on your airplane.
Philip: Agreed and I think we touched upon this on our last podcast which is that the more connected devices you use the greater the risk. I mean, the benefit obviously is that it makes things more efficient for you and it has all the benefits that come with connected technology, but equally you're potentially more vulnerable the more you use this. And that's not to dissuade organizations from using that technology. It's more the point that it's even more important to prepare for cyber risk.
Voirrey: Preparedness and being proactive I would say have definitely been the running themes of these two podcasts that we've done and I think where there is now there is legislation that already does apply to the kind of the wider transportation industry it is going to be quite interesting to see how legislation from you know other organizations such as the IMO kind of how that develops over time as we get more real-time data and the advance of autonomous shipping you know how that's going to be legislated with regards to cyber security and robustness and how that's then going to have an impact on how autonomous shipping develops as we move forward and you know when ECDIS was first kind of thought of and created the legislation that governs that has developed over time and you know ultimately became a requirement for all vessels over a certain size to have ECDIS on board so the industry is not adverse to technology but I do think you know it needs to be hand in hand with proactive guidance.
Philip: Agreed. So what takeaways do you have?
Voirrey: I would say from today's podcast, my key takeaway is that a cyber attack should be treated as any shipping casualty. You need to act swiftly, you need to take control of the narrative, and you need to ensure your team really knows what to do. They need to have trained, they need to know who to call, they need to know how to react to these kind of incidents. And by team I mean everybody from the ship crew all the way through to the people in the head office that are going to be receiving that call from the ship. It really does take a village and that's something that I think I hope we have made clear throughout this. You need a wide team of experts that can help you deal with this situation in the most efficient and effective manner to help you regain control potentially of your assets or your systems and also to minimize repetitional damage to you and your company. That would be my key takeaway, Philip.
Philip: I agree with all of that. I would also add that it's worth knowing what the international landscape looks like because if you could track what the cyber requirements are across your geographical spread then at least you know what you're dealing with and these requirements often overlap to a significant degree so one way to minimize anxiety about this is to know what you're up against so that you know what you need to prepare for.
Voirrey: Well we are a very global industry so I think knowing what's going on wherever you are operating is definitely a key takeaway from this. Thank you everyone for listening. We hope that you join us again on Trading Straits.
Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith’s Energy and Natural Resources or Transportation practices, please email tradingstraits@reedsmith.com. You can find our podcasts on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
Partner Philip Thomas and associate Voirrey Davies discuss the importance of cybersecurity in shipping. Some of the topics include the risks, examples of cyberattacks and tips on how to prevent them.
Alice Colarossi and Julia Norsetter discuss how the Jones Act poses challenges for the development of offshore wind projects in the U.S. They explain the contents of the Jones Act, provide commentary on its implementation, and discuss solutions that have been used to overcome its restrictions.
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Transcript:
Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges, and topics of interest from Reed Smith litigation, regulatory, and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
Julia: Good afternoon. Welcome back to Trading Streets. My name is Julia Norsetter, and I'm here with Reed Smith council, Alice Colarossi , and we're ready to talk about the Jones Act and offshore wind. Hi, Alice. How are you doing today?
Alice: Hi, Julia. I'm doing very well. Thank you. How are you doing?
Julia: Hey, I'm doing great. So I was thinking we could just jump right in here. So what's kind of the latest on the U.S. offshore wind market? Where do things currently stand?
Alice: Yeah, well, it is a mixed bag. I think we see a lot of uncertainty, but also a lot of potential. So on the one hand, the U.S. offshore wind sector is still very far behind the European and the Asian offshore wind sectors. We're also far behind the goals that the Biden administration had set for the sector back in 2021. So the goal was to have 30 gigawatts of offshore wind capacity in the U.S. by 2030. People refer to it as the 30 by 30 goal. But according to the latest reports that I have seen, the U.S. Should only have about 16 gigawatts of offshore wind capacity by 2030. So that's just a bit more than half of the 30 by 30 goal. I would also mention that the two leading candidates for the U.S. Presidential election have quite opposite views on the significance and the future of the U.S. offshore wind sector. And therefore, there is a lot of uncertainty in the near future, how many federal leases will be available for offshore wind projects in the next few years, and so on. So it is really a challenging environment. But on the other hand, there's a real push among players in that field to try to catch up with the rest of the world and the Biden 30 by 30 goal. So according to recent reports, we could reach that 30 goal as early as 2033. So we may not be that far behind after all. And the Biden administration has approved several major offshore wind projects very recently, perhaps in an effort to achieve as much as possible before the end of the current term. And another significant development that I think we should talk about today is the construction of the very first U.S.-flagged, Jones Act-compliant wind turbine installation vessel by Dominion Energy in Texas. That's a unique, first-of-its-kind vessel. The sea trial just took place in May. That was a major milestone in the construction project. And that Dominion vessel is expected to start installing offshore wind turbines, in Virginia just next year in 2025.
Julia: Terrific. Well, thanks for setting the stage there, Alice. I really appreciate it. You mentioned the recent sea trial of the first Jones Act-compliant wind turbine installation vessel. For those of our listeners who may not be familiar with the Jones Act, could you kind of explain what it means for a vessel to be Jones Act-compliant, and in particular, what this means in the U.S. offshore wind sector?
Alice: Yes, of course. So the Jones Act is what we call the Merchant Marine Act. It's a U.S. law that dates back to 1920. So the Jones Act requires that all vessels, all ships that carry any type of cargo between points in the United States must be U.S. flagged, so U.S. Registered, as well as U.S. built, U.S. owned, U.S. controlled, and mostly U.S. crewed, subject to some limited exceptions. So when I just say that this will be the first wind turbine Jones Act compliant installation vessel, I mean that that will be a vessel that satisfies all of these U.S. requirements. And the technical term here is that the vessel will be U.S. documented with a Coast West Trade endorsement. The implication is that the vessel will be qualified to engage in the Coast Trust trade and so, I mean, carry goods, merchandise, and passengers between ports in the United States. So the Jones Act, the basic rule is that it applies to ports within three nautical miles of the U.S. coastlines. So when you carry goods between U.S. ports or between ports within three U.S. Nautical miles of the coastlines. However, its application was extended as a result of an amendment to the Outer Continental Shelf Lens Act in 2020. So now the Jones Act also applies to energy projects that are attached to the U.S. Outer continental shelf, including offshore wind farms. And therefore, all vessels that carry wind turbines and equipment, which are really a type of cargo rights, all vessels that carry those wind turbines and equipment from U.S. ports to U.S. Offshore wind farms, those vessels must be Jones Act compliant, meaning U.S. Flagged, U.S. built, U.S. owned, U.S. controlled, and mostly U.S. crewed. And yeah, as I mentioned, that Dominion vessel will be the first Jones Act compliant. Offshore wind turbine installation vessel. As of today, there are no such vessels in the market. So the industry is relying on non-Jones Act, non-U.S. Wind turbine installation vessels to build wind farms in the U.S. But in order to build U.S. Offshore wind farms with non-U.S. vessels, the developers have to be extremely careful in order to avoid violating the Jones Act. So specifically, because these non-US vessels are not allowed to transport any type of cargo, including offshore wind farm components between points in the U.S., what typically happens is that the non-U.S. vessels bring the wind turbines directly from a non-U.S. port to the U.S. installation site. And then they remain completely stationary there at the U.S. Installation site during the entire installation. And they rely on smaller vessels that are Jones-like compliance in order to go back and forth between a closer U.S. port and the installation site to bring all the wind turbine components. And to also bring the offshore workers that will do the installation and so on. So people refer to this system as the feeder solution because the smaller U.S. Vessels essentially feed the non-U.S. installation vessel at the installation site. It's really not an ideal solution, to be honest. I mean, for several reasons. One of them is that it requires a lot of ship-to-ship transfers in offshore waters where the conditions can be quite challenging.
Julia: Thanks for that, Alice. lease, there's really quite a few challenges to that feeder solution. I really appreciate you explaining it. So are there other Jones Act offshore wind vessels that are currently being built aside from the Dominion vessels?
Alice: Well, in terms of wind turbine installation vessels, the Dominion Vessel is the only ongoing construction project that has been publicly announced as far as I know. There was another project to build another very similar Jones Act compliant wind turbine installation vessel, but that other project was canceled at the beginning of 2020. I believe the reason was that, I mean, basically the high costs of construction made the project not profitable enough. It was for financial reasons that it was canceled. Because in the case of the Dominion vessel, it's probably worth mentioning that the cost of construction is expected to be more than $600 million. And that's about twice what it would cost to build the same vessel in, say, South Korea instead of the U.S. So the Jones Act U.S. build requirements really increase a lot the cost of construction. And because of that higher cost of construction, those Jones Act vessels must then charge higher charter rates. And those rates won't be competitive outside the U.S. And that's a problem because the U.S. offshore wind market is still quite small. And so there's a limited market to keep those vessels busy. So it's possible that the Dominion vessel will be seen as some sort of test case. And if it's successful and the U.S. Offshore wind sector finally really takes off, we may see other investments in other wind turbine installation vessels in the U.S. But as of today, it's the only I'm aware of. But in the meantime, I should mention that there are other investments in other types of U.S. offshore wind vessels, smaller ones. For example, investments in crew transport vessels as well as offshore maintenance vessels. Those are smaller, I mean, they are smaller investments too, and they tend to be more versatile and easier to reconvert for different uses than wind turbine installation vessels, which are extremely specialized. There's also the first Jones Act compliance work placement vessel that is currently being built. It will be used to strengthen the foundations of U.S. Offshore wind projects, as well as some other specialized projects, such as septic cable installations, I believe. And the keel of that first Jones Act replacement vessel was just laid in May. So that's another exciting development for the industry.
Julia: Thank you. Is there room for non-U.S. players to invest or otherwise participate in these offshore vessel construction projects, despite the complications posed by the Jones Act?
Alice: Well, the scope of what non-U.S. players can do is really limited because of the Jones Act. But there are certainly options for them to get involved in this highly specialized market. So the first thing worth mentioning here is that the Jones Act requires that gross trade qualified vessels must be owned by either U.S. Individuals or entities that are at least 75% U.S. owned at each tier in their ownership chain. So this means that there can be a minority 25% non-U.S. Shareholder in the vessel-owning entity. This also means that tiered corporate structures can be used to a certain extent to allow more non-U.S. Interests into the ownership group by essentially diluting the non-U.S. Participation into several tiers. But U.S. persons will still have to own the majority of the stock in the aggregates when all tiers are considered, and U.S. Persons must also retain absolute control over the vessel-owning entity. And then while there are also other strategies that have been successfully used to allow non-U.S. Persons to participate in Jones Act investments, one of them is to give those non-U.S. persons convertible warrants instead of equity to remain below the Jones Act threshold of 75% of U.S. ownership equity. And then another approach is to rely on what we call the leasing exception to the Jones Act. Under the leasing exception, the owner of a Jones Act vessel can have non-U.S. Shareholders, even be above the 25% threshold, as long as that owner is a passive owner of the vessel. And it is in the business of leasing or other financing transactions, but it is not in the business of operating vessels, and it bare-board charters the vessel that it owns to a Jones Act compliant U.S. Citizen for a period of at least three years. So I'm giving here really a brief overview of the different strategies that have been used, but I want to make it very clear that I'm not describing all of the underlying requirements. And really, before making plans based on any of these options, market players should discuss with council whether they qualify and which strategy is best for them. And I will also say that aside from these options in terms of making equity investments, it's also possible for non-U.S. Persons to finance Jones Act vessel construction projects by extending loans. So the Jones Act does not require that the lenders be U.S. citizens. Non-U.S. lenders can extend loans, but they should be mindful of the limitations that the Jones Act creates on their enforcement options. So if there is a default under the loan, non-U.S. Lenders can foreclose on a share pledge or a preferred ship mortgage, but they will be restricted in their ability to take control of the owning entity or the vessel for the simple reason that they cannot own and control the vessel or its owner under the Jones Act. So once again, there are strategies that can be used to address this issue, and that's something that should be considered in advance and discussed with counsel.
Julia: Wow, there sure is a lot to consider. So is it possible you think that the U.S. will relax the requirements of the Jones Act to alleviate this burden that you describe on the offshore wind industry?
Alice: Well, there really is a lot of uncertainty on that type of policy questions in the U.S. Today, I think, for, I mean, for several reasons, including obviously the U.S. Presidential elections in the fall, and also the fact that the U.S. Supreme Court just overturned its Chevron precedent, I think it was last month, So under Chevron, U.S. Courts gave substantial deference to the interpretation that federal agencies like the Coast Guard, CBP, and Merit made up laws such as the Jones Act. But now in the post-Chevron environment, we could see a number of legal challenges and changes in the way the Jones Act is construed and implemented. But I think it's fair to say that it is extremely unlikely that the Jones Act requirements will be relaxed anytime soon. The Jones Act is really entrenched in the U.S. shipping industry. And any attempt to soften the law or the implementing regulations has been met with a lot of resistance in the past. Jones Act lobbies is very strong in D.C. But I also think it's worth noting that there are other strategies that the U.S. Government can use and has used to facilitate the expansion of the fleet of U.S. flags offshore wind vessels, aside from relaxing the Jones Act requirements. And one recent development that's worth mentioning here is the 2022 amendments to the Federal Ship Financing Program, what we call Title 11. That 2022 amendment designated offshore wind supports on maintenance vessels as vessels of national interest and because of this amendment offshore wind vessels now have priority treatment when applying for the private loans that the U.S. Government guarantees under title 11 and these loans have terms that are very favorable for borrowers including low interest rates, So this is another tool that players in this market should really consider using to finance investments in offshore wind, Jones Act vessels.
Julia: Well, thanks for helping provide some clarity for all of this, Alice. It's really terrific information. But you know, that's all the time that we have for today. So we're grateful to our listeners and hope you can join us for the next session of Trading Straits.
Alice: Thanks, Julia.
Outro: Trading Straits is a Reed Smith production. Our producer is Ali McCardell. For more information about Reed Smith's Energy and Natural Resources or Transportation practices, please email tradingstraights@reedsmith.com. You can find our podcast on Spotify, Apple, Google, Stitcher, and reedsmith.com, and our social media accounts at ReedSmithLLP on LinkedIn, Facebook, and Twitter.
Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.
All rights reserved.
Transcript is auto-generated.
Admiralty & casualty lawyers Richard Gunn (partner) and James Scott (counsel) discuss developments in relation to the 1976 Convention on limitation of liability for maritime claims. Richard provides analysis on the application of Articles 12 and 13 of the Convention and James talks on limitation of liability for indemnity claims for wreck removal costs.
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Transcript:
Intro: Trading Straights brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith, litigation, regulatory and finance lawyers across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.
James: Welcome to the Trading Straights podcast on Global Limitation Developments with your host, Reed Smith Casualty lawyers, Richard Gunn and James Scott. This podcast is a continuation of the presentations given recently by Richard and James in Japan Tokyo at the shipping seminar to the local market. I'm James Scott and my section of the podcast is on the Hong Kong final court of appeal judgment number 20 of 2003 on limitation of liability for indemnity claims for wreck removal. Richard will give a talk on his views on other matters in relation to article 12 of the Limitation Convention, but I'll get started on my bit now.
So in January 2019, Antea collided with another vessel called the Star Centurion whilst the latter was anchored in Indonesian waters, Star Centurion became a total loss. The Indonesian Ministry of Transportation issued a wreck removal order to the owners of Star Centurion requiring them to raise and remove the vessel and render her harmless. It was not disputed in this action that the collision was entirely the fault of the Antea. The owners of the Star Centurion commenced proceedings in Hong Kong seeking an indemnity for the costs of complying with the Indonesian order. The owners of Antea commenced their own action in Hong Kong seeking to establish a limitation fund under the 1976 convention. Contrary to their presumptive position in England, the Hong Kong CFA concluded that the owners of Antea could not limit their liability. And before we turn to the reasons for that decision, let's cap the relevant articles of the convention and there's four of them as follows. Article 2.1.A provides for limitation for losses consequential to the direct operation of the ship. Article 2.1.D provides expressly that wreck removal expenses are limitable. Article 2.2 provides that indemnity claims for wreck removal expenses are limitable except for expenses arising from contracts. And fourthly article 18.1 provides that contracting states may reserve the right to exclude article 2.1.D. The effect of exercising that right is that wreck removal expenses cannot be limited under article 2.1.D.
So with these articles in mind, let's talk now on how the courts in England and Hong Kong are likely to apply them. The first thing to say is that article 2.1.D does not apply in either England or in Hong Kong. This suggests that the courts in these two countries apply the 1976 convention differently in relation to indemnity claims for wreck removal. Indeed, following the Hong Kong CFA judgment in the Star Centurion, this appears to be the case. So let's take a look at the position in England first. There is yet to be a directly applicable precedent in England. But many believe that the English courts would find that interparty wreck removal claims fall within article 2.1.A that is that they are consequential on the operation of a ship and therefore limitable. It's clear as a matter of English law that consistent construction must be given to international conventions. In the Aegean Sea, Thomas J referred to precedent whereby the limitation convention is to apply to all cases which can reasonably be bought within its language. And it's been suggested that the decision by the legislators in England not to bring article 21D into force arises from the concern not to leave harbor authorities under compensated. However, there is no evidence of any similar intention to prevent limitation for indemnity claims as was established in the 1961 case of Arabic Number 2. Further under article three, the limitation convention excludes salvage costs when incurred directly with a salvor.
However, if the party that incurred salvage costs submits an indemnity claim in damages against the other party then that claim would be limitable under article 2.1.A. And this indeed was held by the English Court in the 1992 case of the Braden Merchant. Commentators have therefore suggested that an English Court would likely continue the Arabert approach and be willing to view wreck removal costs in the same way. So let's now compare this to the position taken by the Hong Kong courts in the case of the Star Centurion. At first instance, the court focused on the maxim that general provisions do not overrule specific provisions and reasoned that general provisions of article 2.1.A should not give way to the specific provision for wreck removal claims. In article 2.1.D, the view is taken that any country's position would render article 18-1 and the decision not to implement article 2.1.D as meaningless. The court of appeal agreed with the lower court and noted that there is no distinction between statutory private or consequential wreck removal costs. Then the matter went up to the court of final appeal. And this highest court in Hong Kong also agreed and held that the task of the court in construing the convention is to do so without any English preconceptions. And this included the principles arising from the Arabic Number 2. As to the Braden Merchant arguments, the Hong Kong CFA acknowledged that the case had been decided correctly.
However, where that case concerned salvage services, the quarter final of appeal found that the principles do not extend to wreck removal indemnity claims. So in conclusion on this point, the Hong Kong CFA’s judgment makes Hong Kong an attractive jurisdiction for parties seeking to recover wreck removal costs that exceed limitation. And it is not therefore inconceivable that the lower courts of some other convention contracting states might be inclined to follow the Hong Kong CFA judgment and other courts may find it persuasive in general application. Nonetheless, in light of both English precedent and the general presumption to the opposite, it cannot be ruled out that the same question might be determined differently in other courts and particularly in England, The English Court might, for example, find that the Aegean Sea obliges it to interpret the convention so that all cases which can reasonably be brought within its language are so brought. The English Court might also find less reason to distinguish between salvage expenses and wreck removal expenses and so not share the Hong Kong CFA's view on the Braden Merchant. If the question arises before the English Court, the CFA judgment in Hong Kong would nevertheless be a hurdle to overcome as and when the English Court has to consider the question, please look out for further updates on Trading Straits and I'll now hand over to Richard for further views on limitation of liability. Thank you.
Richard: Uh Well, thanks James, the one of the things that we've been discussing in the past was the importance of the cases that you've just been referring to. And, uh, what I'm gonna talk about and it's all about what's in and what's out of the fund and that affects all interests, Really - owners, charterers, cargo, hull, P&I, in fact, the entire industry and the fund has become increasingly important. uh, At a time when, uh, it was thought that after the protocol was introduced, that limitation issues would fall away. That turns out not to have been the case. And the reason for that is that if it's out, then uh that's an additional owner's liability. Uh And if it's in, then obviously, that reduces the owner's liability, but equally reduces the amount that other claimants can take from the fund. And that's why it covers all issues really. Now, the point that I'm gonna look at now is the point that arose from the MSC Flaminia case, which the listeners may recall was a fire on a container ship some years ago.
Now these cases take a long time to get through the courts. Uh principally because one has to wait for G/A to be dealt with and the complex issues relating to the size of claims of quantum when it does come through. Uh There was some interesting points interesting for lawyers and uh ultimately, the outcomes are interesting for everybody. The particular case that struck me was the MSC Flaminia and I'll give the citation that was [2022] EWHC 835 heard by Justice Baker. You'll be familiar with the facts, I'm sure. But uh the issues that arose in relation to certain things was in this application by the owners to have a claim brought by one of the charters that their action uh to enforce an arbitration award should be barred under article 13 of the London Limitation Convention.
Now, London Limitation Convention provides at article 13 that where a limitation fund has been constituted in accordance with article 11, that's just the basic fund that uh provision that sets out how to it. Any person having made a claim against the fund shall be barred from exercising any rights in respect of such a claim against any other assets of the person by or on behalf of whom the fund has been constituted. So in other words, you can't go after the owner. If it's the owner's fund, you can't go after the owner in any other jurisdiction. You can only go against the fund as I say the charters or had an arbitration award. And it was contemplated that they would enforce uh against MSC uh the subject of the particular case in some other jurisdiction. And uh MSC then applied to an anti suit injunction restraining that party from doing so under article 13. And it's quite a long judgment to be fair. Uh quite a difficult judgment if you're a non English uh speaker, in fact, for many English speakers, they might find it difficult too. It's quite complex and requires a couple of readings to deal with issue as sole uh and various other aspects. But the important point, there are two important points, I suppose.
One is that the English court refused the application. They said no, the particular claimant was perfectly at liberty to bring his claim elsewhere. And there were a number of reasons for allowing that. But one of which uh uh which is the important one which lit me up was that the court said that there was no evidence that the claimant had any intention to claim against the fund whatsoever. And that could be found at paragraph uh 87 of the judgment. So there was no evidence that the claimant was going to bring a claim against the funds. And that was a reference to the wording in the clause, having made a claim against the fund. And the judge said, well, if he's not made a claim against the fund and he has no intention of making a claim against the fund, then article 13 cannot apply. And therefore there was no right to the bar to any other action. At the time uh that was regarded as somewhat controversial. Uh But on reflection, one can see that that seems right.
Why should uh the convention which is only applies to those states that have signed up to it have some global effect over other jurisdictions and other parties in different places that apply different limitations. The U.S., for example, is not a signatory to the Limitation Convention. Uh Other countries are signatories to the Limitation Convention but not the protocols or the subsequent uplifts. So clearly, uh it applies that there should be different aspects in different parts of the world and the English courts were going to uphold that. And it seems to me that that's clear and not contrary to uh to the laws that James was talking about earlier. The point there being that in fact, there should be a standard if you'd like, a global standard. But that's only in respect of the particular convention to which it applies. So that gave me thinking then about um other clauses within the limitation convention itself, in particular uh article 12. Now, article 12 provides as follows and this is to do with distribution of the fund. What this says is that if before the fund is distributed, the person liable or his insurer has settled a claim against the fund, such person shall up to the amount he is paid, acquire by subrogation, the rights which the person so compensated would have enjoyed under this convention. In other words, if you set up the funds and that's often, that's the club or the hull or some mixture of owners of the club and others, if you set up the funds, and nevertheless, you settle some other claim. Uh You can normally then claim back against your own funds. Certainly that's been the, the practice over many years uh in London and I'm sure elsewhere. But if I apply the same reasoning that Justice Baker applied to the article 13 in the MSC Flaminia, what we saw in MSC Flaminia, I'll remind you is that article 13 said that the right to bar an action only existed in circumstances. Uh And the law says, uh with a person having made a claim against the fund is barred. So Baker said, yeah, well, there must actually be a claim against the fund or the intention to make a claim against the fund if the convention refers to a claim against the fund. Uh and uh as a matter of English, that seems quite clear now, those words, “claim against the fund” in article 13 are replicated in article 12 and it follows therefore that if you have settled a claim uh in any particular incident and seek to claim against the fund yourself by the rights of subrogation set out in article 12, the claim that you have settled must have been a claim that was actually made against the fund or there was intention to bring that claim against the fund. And if there wasn't, you have simply settled a claim in some other jurisdiction and there are no rights to bring that back against your own fund. And remember if you bring it back against your own fund. It diminishes the recovery of the other parties against the fund and actually allows you to claim your losses in respect of that settle claim are, are less, by contrast, if you can't bring it against the fund, it's a liability that sits probably with the P & I club and/or the ship owner outside of the fund, uh, and allows a greater recovery for those people claiming against the funds. Now, uh this, this is my judgment. It's not uh opinion, I suppose a lot of the judge. Well, I'm not a judge, of course, the uh uh uh ask the meaning of those words, but nevertheless, it seems to follow.
Now just to bring that up to date and where that might take us in the case of the Ever Given, uh which is in front of the courts. The facts there as people are very familiar with, ran aground in the Suez Canal on the 23rd of March 2021 and it was refloated subsequently a week or so later. Uh long delays. Nevertheless, I in the canal with other vessels and on the third of July 2021 a limitation degree was granted in England by uh the Admiralty Registrar and those proceedings continue in that action, the fund is around U.S. dollars, $115 million and there are claims being brought against it by numerous claimants including several delay claims and some, some cargo claims, although they are limited, the majority of the claims tend to be delay claims for other vessels that are outside the canal or you could not get through because the canal was blocked for serious lengths of time. Owners having set up the, the limitation fund have settled claims in the region of between $40- $80 million, the precise amount is currently unclear but a sizable proportion. And if those claims were outside of the fund, then it's highly likely that the claims against the fund would not reach limit. And that's important then for the claimants against the fund, it's also important procedurally in moving that action forward. Therefore, an application has been made in the English courts for this position on article 12 to be determined such that if in fact, one applies that same reasoning as applies to article 13, that would remove the issues of the owner's claims and if successful, thereby increasing the recovery for the other claimants against the funds to significant proportion. And the reason that it's thought that there might be some success in that is because the owners claim that they have paid were to the Egyptian authorities. And it is quite clear uh as was made clear by owners and indeed by the authorities, they had no intention of bringing a claim against the funds and they have not brought a claim against the fund. If that's right, then it seems that the owners would not have set up a claim against the fund as is required by article 12. And therefore, they don't acquire the rights of subrogation set out to.
That's an important point and tied in with James's points as we've spoken about earlier, there were some interesting developments in uh in limitation having thought that there wouldn't be. That sort of brings me to the end. Thank you, everybody for listening to this podcast and the Trading Straight series and we hope to see you back or hear you back shortly. Uh If you've got any questions in relation to this, then of course, do feel free to get in touch with James I others uh others in Reed Smith as you might prefer and we look forward as I say to seeing you again. Thank you.
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