The issue of what the Federal Maritime Commission (FMC) may consider in assessing whether a demurrage or detention practice is unjust or unreasonable has seemingly been put to rest with FMC having the final word..
On the 28th of April 2020, the FMC issued its final rule on its interpretation of the Shipping Act prohibition against failing to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property with respect to demurrage and detention..
The background of the rule
If you recall, in September 2019, the FMC called for public comment on its “Interpretive Rule on Demurrage and Detention under the Shipping Act” and in assessing just and reasonable regulations and practices relating to these charges..
This Interpretive Rule was a culmination of years of complaints from importers, exporters, OTI and truckers in the USA, that ocean carriers and terminal operators were penalising them with unfair demurrage and detention practices even when circumstances of such were beyond their control..
These complaints led the FMC to set up a Fact Finding Investigation No.28, for which the FMC sought comment in a Notice of Proposed Rulemaking (NPRM) because they belived that the results of this investigation substantiated many of the above mentioned concerns.
The interpretive rule was intended to reflect three general principles:
- Importers, exporters, intermediaries, and truckers should not be penalized by demurrage and detention practices when circumstances are such that they cannot retrieve containers from, or return containers to, marine terminals because under those circumstances the charges cannot serve their incentive function ;
- Importers should be notified when their cargo is actually available for retrieval ;
- Demurrage and detention policies should be accessible, clear, and, to the extent possible, use consistent terminology
The Commission’s proposed rule listed some non-exclusive factors that the Commission may consider when assessing the reasonableness of demurrage and detention practices under 46 U.S.C. 41102(c) and 46 CFR 545.4(d)..
It also said that each § 41102(c) case would continue to be decided individually on its merits and facts with the proviso that the rule would not preclude parties from raising factors beyond those listed in the rule or the commission from considering the same..
In terms of public comments, the Commission received just over one hundred comments with the vast majority of these supporting the commission’s findings/rule with the support coming naturally from American importers, exporters, intermediaries, and truckers while ocean carriers, terminal operators and the World Shipping Council opposed the same..
Adoption of the Interpretive Rule
After due consideration of the comments, the FMC seems to be adopting the interpretive rule with a few changes including revising the regulatory text to:
- adopt a policy regarding demurrage and detention practices and government inspections; and
- to make clear that the rule does not preclude the Commission from considering additional factors outside those specifically listed.
In its 95 page report, the Commission has advised that “the rule is not intended to, and cannot, solve every demurrage and detention problem or quell all disputes“..
The rule is said to reflect the Commission’s finding that all segments of the industry will benefit from an advance notice of how the Commission will approach the “reasonableness” inquiry under § 41102(c).. The commission is of the belief that this guidance will promote fluidity in the U.S. freight delivery system by ensuring that demurrage and detention serve their purpose of incentivizing cargo..
In this regard, the Commission has also made technical formatting changes amending the language of the rules to recognise that these charges might have other purposes, such as reimbursing ocean carriers for “additional costs associated with cargo remaining on a pier after free time”..
The Commission recognised that “demurrage and detention are not the mechanisms by which ocean carriers recover all costs related to their equipment, and the Commission cannot assume that these charges are the primary method by which ocean carriers recover their capital investment and container costs” as some commenters suggested..
The Rule is said to also consider a few principles when determining how § 41102(c) may apply in the demurrage and detention context :
The Commission emphasized that concepts such as cargo availability or accessibility refer to the actual availability of cargo for retrieval by a shipper or trucker..
The report said that the Commission would consider certain practices that would weigh favorably in the reasonableness analysis, such as the commencement of agreed free time upon container availability and stopping a demurrage or free time clock when a container is rendered unavailable, such as when a trucker cannot get an appointment within that free time..
Meaning, under the new guidance, it is unreasonable for demurrage to apply when cargo is not actually available for pickup during free time..
While declining to define “container availability,” as it can vary by port or marine terminal, the cargo availability at a minimum includes things such as the physical availability of a container: whether it is discharged from the vessel, assigned a location, and in an open area (where applicable)..
Depending on the facts of the case, the Commission may consider things such as appointment systems and appointment availability and trucker access to the terminal, i.e., congestion..
Empty container return
As per the rule, the Commission may find it unreasonable if an ocean carrier or marine terminal operator charges detention for empty containers that cannot be returned within the due time frame, for example, when a terminal or depot refuses to accept them..
The Commission also listed additional situations where the imposition of detention may be considered unreasonable, such as uncommunicated or untimely communication of changes in container return conditions or notice of terminal closures..
Cargo Availability Notices
The rule also states that when assessing if the demurrage practices were reasonable, the Commission may consider whether and how the carriers have provided notice to cargo interests that their cargo is available for pick up from the terminals..
The rule further states that the Commission may consider the type of notice, to whom notice is provided, the format of notice, method of distribution of notice, the timing of the notice, and the effect of the notice..
This factor reflects that
- ocean carriers are obligated under their contracts of carriage to give notice to consignees so that they have a reasonable opportunity to retrieve the cargo (Read the article on whether a shipping line is liable for any costs if they don’t send arrival notification for import cargo..?? This seems to work differently in other parts of the world..) ;
- that notification practices must be reasonably tailored to fit their purposes under § 41102(c), and
- the notion that aligning cargo retrieval processes with the availability of cargo will promote efficient removal of cargo from valuable terminal space..
The Commission acknowledged that inspections by Government authorities like Customs, Police etc has a significant impact on the application of demurrage and detention costs..
To be consistent with the “incentive principle”, the Commission sought comments on 3 proposals relating to demurrage and detention costs due to Government Inspections :
- demurrage and detention practices and regulations are likely to be found unreasonable while cargo is undergoing government inspection ;
- mitigation of demurrage and detention practices and regulations such as by waiver or extension of free time, while cargo is undergoing government inspection ;
- a cap on the amount of demurrage or detention that may be imposed while cargo is undergoing government inspection
While there was support for options 2 and 3 in the comments, in its final rule, the Commission has stated that while considering the reasonableness of demurrage and detention practices in the context of government inspections, they may consider the extent to which demurrage and detention are serving their intended purposes and also consider any extenuating circumstances such as the extent to which a shipper complies with its customary responsibilities such as submitting complete, accurate, and timely paperwork..
If circumstances demonstrate the need for more specific guidance in this regard, especially as to specific ports or terminals or specific types..
Demurrage and detention policies
The Commission has indicated that it will consider the existence, accessibility, content, and clarity of demurrage and detention policies, including dispute resolution policies of the carriers and terminal operators.. Basically, “whether a regulated entity has demurrage and detention policies that reflect its practices”..
The Commission noted that while it will avoid any interpretation that would be inconsistent with the statutory obligations of ocean carriers and marine terminal operators regarding the publication of tariffs and marine terminal operator schedules, such publications will weigh in favor of a reasonableness finding on the part of the regulated entities..
Dispute Resolution Policies
The Commission explained that in ascertaining reasonableness under § 41102(c) whether ocean carrier and marine terminal operator demurrage and detention it may consider dispute resolution policies which “address things such as points of contact for disputing charges; time frames for raising disputes, responding to cargo interests or truckers, and for resolving disputes; and the types of information and evidence relevant to resolving demurrage or detention disputes“..
The Commission noted that the “efficacy (and reasonableness) of dispute resolution policies also depends on demurrage and detention bills having enough information to allow cargo interests to meaningfully contest the charges”.. The Commission also suggested that tieing up the billing relationships to ownership or control of the assets that are the source of the charges would promote transparency and the alignment of stakeholder interests..
The Commission may find the use of unclear terminology in demurrage and detention tariffs unreasonable because it was made clear that the usage of inconsistent terminology by ocean carriers or terminals results in confusion for shippers, OTIs, or truckers and will weigh against the regulated entities in the Commission’s reasonableness analysis..
As per the FMC website, the final rule, “Docket No. 19-05, Interpretive Rule on Demurrage and Detention under the Shipping Act”, will become effective upon its publication in the Federal Register..
The final rule adds two provisions that were not included in the proposed rule published in September 2019.. The first clarifies that the guidance in the rule is applicable in the context of government inspections.. The second clarifies that the rule does not preclude the Commission from considering additional factors, arguments, and evidence outside those specifically listed..
As per FMC Chairman Michael Khouri, the “guidance is intended to reform and influence future demurrage practices” and noted that the Commission may take future actions to further clarify how the guidance will be implemented in various factual circumstances.. “This guidance for industry stakeholders will hopefully result in revised and reformed business practices that, in turn, will lead to improved freight fluidity” he added..
So is this end of the chapter of whether Demurrage and Detention charges are justified..??