FMC Issues Final Guidance on Unreasonable Demurrage and Detention Practices to Improve Ocean Freight Fluidity
Date: April 30, 2020
On April 28, the Federal Maritime Commission (FMC or Commission) issued a final interpretative rule on ocean carrier and marine terminal demurrage and detention practices governed by the Shipping Act of 1984. The rule runs nearly 100 pages and provides important and extensive guidance on the factors the FMC will consider when determining whether demurrage or detention practices and regulations are unjust or unreasonable.
The rule is the result of a nationwide fact-finding investigation the FMC initiated in response to an industry petition filed by the Coalition for Fair Port Practices – a group of trade associations representing importers and exporters, draymen, freight forwarders and customs brokers. The petition identified concerns about the assessment of demurrage and detention charges when delays in cargo pickup and equipment return are beyond the control of importers, exporters or intermediaries and inadequate processes for disputing the charges. The rule largely follows the principles the Commission set forth in its September 13 proposed version of the rule, with a few minor changes. It also contains extensive commentary in response to hundreds of comments the agency received on the proposed interpretive rule, including legal and policy challenges ocean carriers and marine terminals asserted in opposition to the rule.
The final rule contains a non-exhaustive list of factors the Commission may consider in its reasonableness analysis. The rule’s overarching principle requires the Commission to consider the extent to which demurrage and detention charges serve their intended purpose as financial incentives to promote freight fluidity (“Incentive Principle”). Nonetheless, the Commission amended the rule’s language to recognize that these charges might have other purposes, such as reimbursing ocean carriers for “additional costs associated with cargo remaining on a pier after the expiration of free time.” The Commission explained that “demurrage and detention are not the mechanism 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 ocean carriers suggested.
The Commission also clarified that the Incentive Principle would be applied to evaluate the reasonableness of charges assessed in relation to force majeure events and in other cases where free time has expired. Moreover, the rule recognizes that fulfillment of cargo retrieval responsibilities by shippers, receivers and draymen is relevant to reasonableness assessments.
Other key principles the Commission will consider when determining whether demurrage and detention practices and regulations serve their intended purpose of promoting freight fluidity include:
- Cargo availability. The final rule continues to hold that the Commission will consider the extent to which free time and demurrage practices and regulations relate to actual cargo availability for retrieval. Thus, under the new guidance, it is likely unreasonable for demurrage to apply when cargo is not actually available for pickup during free time. The Commission also explained that it does not intend to establish bright-line rules for when a free time should be started or stopped, when interruptions in availability arise, and these issues will be considered on a case-by-case basis. Although the Commission declined to define “container availability” because it may vary by port or terminal, it did state that “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).” Appointment systems and availability and trucker access to the terminal also may be considered when evaluating the container availability principle.
- Empty container return. The rule indicates that the Commission may find it unreasonable if an ocean carrier or marine terminal operator assesses detention when empty containers cannot be returned, such as when a marine terminal refuses to accept them or when there is a failure to communicate a change in the container return location. The Commission also indicated that it may disfavor practices that apply in the context of dual move requirements or changes in return location.
- Cargo availability notices. The rule indicates that the Commission may consider in its reasonableness analysis whether and how cargo interests are provided notice that cargo is available for pickup. When evaluating the reasonableness of cargo availability notices, the Commission may also consider the type and format of the notice, to whom it is provided, and its timing, effect and method of distribution. Although the Commission stopped short of specifying bright-line rules regarding cargo availability notices, it indicated that it will favor practices tailored to adequately inform shippers and their agents of cargo availability, such as push notifications, notifying users of changes in container availability, linking free time to notice of availability and appointment guarantees, in its reasonableness analysis.
- Government inspections. In its proposed rule, the Commission included three alternatives identifying when demurrage and detention rules and practices might be unreasonable as applied to government inspections. In the final rule, it devised a new approach that suggests it will consider the extent that demurrage and detention practices and regulations, as they are applied to government inspections, relate to the Incentive Principle absent any extenuating circumstances, such as whether shippers and receivers complied with their customary obligations.
- Demurrage and detention policies. The final rule indicates that the Commission will consider the existence, accessibility, content and clarity of demurrage and detention policies, including dispute resolution policies. Although the Commission noted that it will avoid any interpretation that would be inconsistent with the statutory obligations of ocean carriers and marine terminal operators regarding publication of tariffs and marine terminal operator schedules, it indicated that it will weigh in favor of a reasonableness finding if the regulated entities go above and beyond these requirements. The rule also suggests that the Commission will consider the extent of information on points of contact and timeframes in dispute resolution policies. Importantly, it also indicates that dispute resolution practices that impose onerous evidentiary requirements or that do not contain guidelines on corroboration requirements may be found unreasonable.
- Transparent terminology. The rule indicates that the Commission may find the use of unclear terminology in demurrage and detention tariffs unreasonable. The Commission also made clear that ocean carriers or marine terminals using terms inconsistently may result in confusion for shippers, intermediaries or truckers and will weigh against the regulated entities in the Commission’s reasonableness analysis.
Finally, the Commission added a new paragraph to the final rule clarifying that it may consider other factors, arguments and evidence in addition to those listed in the rule.
In a statement about the final interpretive rule, FMC Chairman Michael Khouri explained that 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. Specifically, he stated that “this guidance for industry stakeholders will hopefully result in revised and reformed business practices that, in turn, will lead to improved freight fluidity. As the Commission moves forward in this area, future actions may include Notices of Inquiry (NOIs) into various focused fact scenarios. These NOIs will be designed to bring public awareness to problematic business practices and provide further clarity to potential applications of the Interpretive Rule.”
FOR MORE INFORMATION
For more information, please contact:
Karyn A. Booth
Jason D. Tutrone
*Admitted only in Istanbul and New York; not engaged in the practice of law in the District of Columbia.
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