Andrew Oldland QC
Posted on 17 Apr 2014

Pilotage Charges: Demonstrating Reason in the Face of Unreason

Harbour authorities face legal curbs in raising cash to cover pilots’ pension fund deficit

UK COMPETENT harbour authorities have been placed in a very difficult situation by the requirement to contribute substantial sums of money as part of the Pilots’ National Pension Fund deficit-recovery plan.

Nevertheless, to avoid litigation under S31 of the Harbours Act 1964, when increasing pilotage charges, they must be able to demonstrate reasonableness.

Most competent harbour authorities are seeking to recover all or some of the deficit contributions requested by increases in pilotage charges, many by levying a “surcharge”.

Smaller CHAs that are affected may now only provide a very limited pilotage service.

These CHAs are facing particular difficulty in funding the required contributions due to the lack of service users on whom they can levy such surcharges.

Despite these difficulties, under S10(1) Pilotage Act 1987 it is necessary for any increase to be “reasonable”. The starting point is transparency.

While levying a surcharge comparable to those at other CHAs may be indicative of reasonableness, increases need to be justified in relation to the circumstances facing the particular CHA.

The recent review by UK ports group ABP demonstrates this. Having initially set a blanket 5% surcharge, ABP’s 2014 surcharge at each ABP CHA is based on the liabilities of that CHA. For example, in the Humber Pilotage Area ABP is imposing a 10% surcharge, whereas at Southampton it remains at 5%. 

When calculating the increase in pilotage costs needed cover the deficit contribution each CHA should consider yearly its projected pilotage income against the day-to-day costs of providing the service.

A long-term strategy in respect of funding escalating deficit contributions over the 16-year period, or under any future recovery plan, and future capital expenditure also needs to be in place. 

Significant “surplus” of funds already held in respect of pilotage charges should be considered.

It could be “unreasonable” to increase substantially charges where a large surplus exists. Surcharges should apply fairly across all the CHA’s pilotage users.

Justification will be required for surcharges that only affect some vessels or pilotage services and not others.

To dissuade action being taken against them, CHAs should be prepared to demonstrate the “reasonableness” of any increases in charges, by reference to the review they undertook to determine the level of increase.

If the charge is not believed to be “reasonable” then, under section 10(6) of the Act, there is a right of objection to the secretary of state for various persons, including “the owners of ships which customarily navigate the harbour in question”.

Objections are made under S31 of the Harbours Act. Under S31(2)(ii) grounds include “that the charge ought to be imposed at a rate lower than that at which it is imposed”.

S31 also sets out the procedure to be followed. When reaching a decision, the secretary of state may either approve the charge for a period of not more than 12 months, or give the CHA directions with respect to the charge to meet the objection, S31(6).

Objections under S31 of the Harbours Act can also be made in relation to “ship, passenger and goods dues” (S26 of the Act). 

The most high-profile objection to date was by three ferry companies against Dover Harbour Board in relation to its 2010 and 2011 harbour dues.

The ferry companies’ objection was not upheld, but nevertheless the decision of the secretary of state and the accompanying inspector’s report provide useful guidance as to the matters to be considered at inquiry.

It is likely that similar considerations would apply in respect of a challenge to pilotage charges. The three key issues to be addressed were:

  •  Whether the dues are commercial and competitive;
  •  Whether they are fair and equitable;
  •  In all respects, whether they are reasonable.

It is clear that consideration is given to the cost of providing the services in question, including longer term capital expenditure, budget deficits and the projected income from levying charges. 

As such it is advisable that CHAs are able to justify any increases by reference to such matters.

In Humber Oil Terminals Trustee Limited v ABP [2011] EWHC 1184, which related to a dispute over the interim rent payable under a lease, Mr Justice Morgan was required during a case-management hearing to determine whether ABP was required to provide Humber Oil with details of the costs of operating, maintaining and investing in the Port of Immingham.

The judgment held that in relation to the interim rent dispute, such information did not have to be provided.

S31 of the Harbours Act and harbour dues were considered. During the case, ABP’s position was that when negotiating the level of harbour dues with users, it did not ever put forward any information as to any of the costs incurred by ABP either in running the port, or in investing in the port, as a justification for the level of dues and would not be willing to provide information as to its costs.

During the judgment, Morgan J commented: “Even if one were to contemplate what would happen in the course of a possible objection under S31 of the 1964 Act, the harbour authority will not necessarily put forward a case to the secretary of state which relies upon the costs of operating, maintaining or investing in the port, or some of those costs.”

However, the authors consider these comments were obiter dicta and should not be relied on to justify a refusal to provide any information about the costs incurred in running pilotage services when seeking to justify the level of pilotage charges or any surcharge imposed.

If an objection was made under S31 of the Harbours Act, it is difficult to envisage how a CHA could justify the “reasonableness” of the charge imposed without reference to the costs of operating, maintaining or investing in its pilotage services.

Ports empowered to levy charges

THE Pilotage Act 1987 governs pilotage charges.

Under section 10(1): “A competent harbour authority may make reasonable charges in respect of the pilotage services provided by it.”

Many ports and harbours in the UK fall within the definition of competent harbour authorities in the act. Where a CHA provides pilotage services, its pilots are either employed directly by the CHA, or self-employed.

Regardless of that distinction, pension contributions are made to the Pilots National Pension Fund, which in December 2010 had a deficit of approximately £187m ($310m).

In a widely publicised ruling (The PNPF Trust Company Ltd v Taylor & Ors [2010]) the High Court held that the trustee of the PNPF has the power to demand contributions from CHAs to cover the deficit, in respect of both employed and self-employed pilots.

Following the discontinuation of an appeal to the Court of Appeal in November 2011, CHAs have been notified of the contributions required from them towards the deficit.

The amounts vary widely from ABP 34.6%, approximately £68m across its CHAs, to many smaller CHAs being required to pay sums equating to less than 1%.

Payment can be made as a lump sum, or through escalating payments over a 16-year period.

A further triennial review was due on December 31, 2013, with the outcome to be known later this year. Contributions may increase further as a result.

Andrew Oldland QC is a barrister and partner at Michelmores. Lara Moore is a solicitor at Michelmores.

As published by Lloyds List