On April 28, 2020, the Federal Maritime Commission (FMC) issued its “Interpretive Rule on Demurrage and Detention under the Shipping Act,” which will become effective once it is published in the Federal Register. The timing of the rule is particularly prescient in light of the COVID-19 pandemic and associated decrease in container volume to and from the United States. Before explaining the rule’s significance, we should explain the purpose of the FMC and the power by which it operates. The overall purpose of the FMC is to promote and protect the maritime industry throughout the United States. To that end, the FMC regulates the industry to encourage fair and reasonable practices, especially as it relates to the activities of ocean carriers, marine terminals, and ocean transportation intermediaries (such as freight forwarders and non-vessel owning common carriers, also known as NVOCCs).
In part, the FMC regulates the maritime industry through 46 U.S.C. § 41102(c), which states as follows:
(c) Practices in Handling Property.
A common carrier, marine terminal operator, or ocean transportation intermediary may not fail to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property.
This regulation does not prevent a common carrier, marine terminal operator, or ocean transportation intermediary from contracting for separate terms and conditions with specific customers but with respect to those rates and terms which are published or otherwise authorized by the FMC, they must be applied consistently and fairly.
In the event there is an allegation of unjust or unreasonable regulations or practices, the FMC permits parties to seek reparations. 46 C.F.R. § 545.4 provides the elements that must be established to obtain such reparations, and states as follows:
§ 545.4 Interpretation of Shipping Act of 1984—Unjust and unreasonable practices.
46 U.S.C. 41102(c) is interpreted to require the following elements in order to establish a successful claim for reparations:
(a) The respondent is an ocean common carrier, marine terminal operator, or ocean transportation intermediary;
(b) The claimed acts or omissions of the regulated entity are occurring on a normal, customary, and continuous basis;
(c) The practice or regulation relates to or is connected with receiving, handling, storing, or delivering property;
(d) The practice or regulation is unjust or unreasonable; and
(e) The practice or regulation is the proximate cause of the claimed loss.
[83 FR 64480, Dec. 17, 2018]
After years of complaints, the rule is designed to provide guidance on how to effectively and reasonably enforce existing practices concerning the assessment of demurrage and detention. Before the assessment of any such charge, we need to consider the concept of “free time.” After a container is discharged from the ship, the consignee—the party designated to accept delivery—is supposed to be promptly notified that it is ready for pick up. “Free time” is a set amount of time by which the consignee is allowed to pick up the container without any further charge by the ocean carrier or marine terminal. Once “free time” expires, the ocean carrier is permitted to charge “demurrage”—usually assessed on a per day basis—for amount of time the consignee is delayed in picking up the container. “Detention” is a little different. After the trucker hired by the consignee to picks up the container, the trucker is supposed to deliver the container to the location designated by the consignee. In some cases, the driver waits for the receiver to immediately unload the container. In other cases, the driver will return at some agreed time and date to pick up the container. The container is for all intents and purposes the property of the ocean carrier and is entitled to its return. There is an agreement between the consignee and ocean carrier as to the amount of time the container can remain outside the marine terminal. Typically, the amount of free time for the return of the container is one or two days. “Detention” refers to the charge assessed for any additional days the container is not promptly returned after free time expires.
Going forward, the rule requires that parties should be notified when their cargo is actually available for retrieval. The word “actually” is significant because many importers complained that when they came to pick up their cargo, the containers were not available or ready to be released. The other significant requirement is that “demurrage and detention policies should be accessible, clear, and, to the extent possible, use consistent terminology.” Importers often complained that ocean carriers and marine terminals would use outdated language to explain their policies on the pickup and return of containers, and would apply these rules in an inconsistent manner, especially with respect to whether certain charges could be waived or otherwise not enforced.
The most important change, however, relates to this notion of “once on demurrage, always on demurrage.” In other words, once demurrage or detention starts, the per day accrual of charges continues until paid. The rule makes clear that a reflexive, “black and white” rule concerning the assessment of demurrage and detention should no longer be applied. In the case of bad weather or government inspections, it is commonplace for marine terminals to be closed to all truck traffic. Given the likelihood that COVID-19 will remain a threat, it is increasingly possible that marine terminals will be forced to shut down from time to time. In such cases, the rule finds that parties should not be penalized when they cannot actually retrieve containers from, or return containers to, marine terminals. In the view of the FMC, continuing the assess demurrage and/or detention is punitive in nature and unreasonable under the circumstances.
This rule was the result of many months of investigation and rulemaking on the part of the FMC. All interested parties had an opportunity to be heard on this matter and the rule will now be effective once it is published in the Federal Register.
David Y. Loh is a member with Cozen O'Connor in New York City, New York.
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