On May 18, 2020, the Federal Maritime Commission (FMC) published its Final Interpretive Rule on Demurrage and Detention Under the Shipping Act (Demurrage/Detention Rule), 85 Fed. Reg. 29638, 29638 (May 18, 2020). This final rule, nearly six years in the making (as detailed in the Background section of the Final Rule), was the culmination of “years of complaints from U.S. importers, exporters, transportation intermediaries, and drayage truckers that ocean carrier and marine terminal operator demurrage and detention practices unfairly penalized shippers, intermediaries, and truckers for circumstances outside their control.” Id. These complaints ultimately led in 2016 to the filing of a formal Petition for Rulemaking by the Coalition for Fair Port Practices (FMC No. P4–16, Ex. A (Dec. 7, 2016) (Pet. P4–16)). The focus of industry concerns, primarily from shippers/shipping intermediaries, centered on the fact that (a) ocean carriers, rather than marine terminal operators, generally controlled demurrage and detention practices, without uniformity or consistency of terms/terminology; and (b) these practices typically allowed ocean carriers and marine terminal operators to levy detention/demurrage charges even when cargo/equipment could not be retrieved or returned due to circumstances outside the control of the shipper/intermediary, which weakened any incentive for the ocean carrier/marine terminal operator to address port congestion and their own operational inefficiencies. Id. at 29639. These concerns, in turn, mobilized a formal investigation (consisting of hearings, field interviews, and document reviews) by the FMC, culminating in FMC Fact Finding 28 and a final recommendation to the FMC Commissioner in August 2019 for development of an interpretive rule on detention/demurrage. [Note – The full record for Fact Finding 28 leading up to issuance of the Demurrage/Detention Rule is documented at the FMC’s website – https://www.fmc.gov/fact-finding-28/.] That recommendation has now been realized with the issuance of the final Demurrage/Detention Rule.
By way of brief background for the FMC’s role regarding detention/demurrage concerns, the FMC is authorized under the Shipping Act (originally enacted in 1916 and intermittently updated since, codified at 46 U.S.C. §§40101 et seq.) to regulate inter alia “common carrier[s], marine terminal operator[s], or ocean transportation intermediar[ies]” by enforcing the statutory mandate that such entities “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.” 46 U.S.C. §401102(c). These mandatory “reasonable regulations and practices” include, under the newly minted Demurrage/Detention Rule, “practices and regulations relating to demurrage and detention for containerized cargo.” 46 C.F.R. §545.5. The FMC has noted three main goals of the Demurrage/Detention Rule, derived from its insights gained during the Fact Finding 28 process:
1. 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.
2. Importers should be notified when their cargo is actually available for retrieval.
3. Demurrage and detention policies should be accessible and clear, and, to the extent possible, use consistent terminology
Id. at 29639.
Based on these three concepts, the FMC’s new Demurrage/Detention Rule, now codified at 46 C.F.R. §545.5, relies on the so-called “incentive principle” as its overall regulatory benchmark for determining the reasonableness of demurrage/detention charges:
[T]he terms demurrage and detention encompass any charges, including “per diem,” assessed by [regulated entities] related to the use of marine terminal space (e.g., land) or shipping containers, not including freight charges.
(c) Incentive principle—
(1) General. In assessing the reasonableness of demurrage and detention practices and regulations, the [FMC] will consider the extent to which demurrage and detention are serving their intended primary purposes as financial incentives to promote freight fluidity.
(2) Particular applications of incentive principle—
(i) Cargo availability. The Commission may consider in the reasonableness analysis the extent to which demurrage practices and regulations relate demurrage or free time to cargo availability for retrieval.
(ii) Empty container return. Absent extenuating circumstances, practices and regulations that provide for imposition of detention when it does not serve its incentivizing purposes, such as when empty containers cannot be returned, are likely to be found unreasonable.
(iii) Notice of cargo availability. In assessing the reasonableness of demurrage practices and regulations, the Commission may consider whether and how regulated entities provide notice to cargo interests that cargo is available for retrieval. 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 notice, and the effect of the notice.
(iv) Government inspections. In assessing the reasonableness of demurrage and detention practices in the context of government inspections, the Commission may consider the extent to which demurrage and detention are serving their intended purposes and may also consider any extenuating circumstances.
46 C.F.R. §545.5. Under this overarching “incentive” principle, the FMC may also consider “the existence, accessibility, content, and clarity of policies implementing demurrage and detention practices and regulations, including dispute resolution policies and practices and regulations regarding demurrage and detention billing, [including] the extent to which they contain information about points of contact, timeframes, and corroboration requirements.” Id. at §545.5(d). Likewise, the FMC may consider “the extent to which regulated entities have clearly defined the terms used in demurrage and detention practices and regulations, the accessibility of definitions, and the extent to which the definitions differ from how the terms are used in other contexts.” Id. at §545.5(e).
Ultimately, the FMC’s focus under the Demurrage/Detention Rule – and the phrasing that is repeated throughout the Final Rule – will be whether “demurrage practices are tailored to their intended purpose [i.e. incentivizing cargo movement] in accordance with section 41102(c).”
The FMC has emphasized – and indeed expressly provided in the rule (46 C.F.R. §545.5(f)) – that the consideration factors set forth in the Demurrage/Detention Rule are not prescriptive or exclusive. Thus “[e]ach section 41102(c) case [will] continue to be decided on its particular facts, and the [Demurrage/Detention] rule [will] not foreclose parties from raising, or the [FMC] from considering, factors beyond those listed in the rule. 85 Fed. Reg. at 29639. And while the FMC acknowledges the Demurrage/Detention Rule is “not intended to, and cannot, solve every demurrage and detention problem or quell all disputes,” it believes the contours provided by the new rule will benefit “ all segments of the industry …[by] promot[ing] fluidity in the U.S. freight delivery system[;] ensuring that demurrage and detention serve their purpose of incentivizing cargo and equipment velocity[;] and… mitigate[ing] confusion, reduc[ing] and streamlin[ing] disputes, and enhance[ing] competition and innovation in business operations and policies.” Id.
Ocean carrier/marine terminal operator interests lodged several objecting comments to the Demurrage/Detention Rule prior to its finalization. Perhaps most notably, they have argued that the rule is legally invalid because: (1) the Demurrage/Detention Rule is not merely interpretive, but rather constitutes a “legislative rule subject to all the Administrative Procedure Act’s (APA) rulemaking requirements” (id. at 29641); and (2) the FMC lacks authority under the Shipping Act to issue the interpretive rule based on certain changes in wording between the 1916 and 1984 versions of the Shipping Act, the latter of which only allows the FMC to adjudicate reactively to unreasonable shipping practices but does not allow proactive prescriptive rulemaking as to such practices. The FMC has offered an extensive, legal-memorandum-style rejection of both these contentions in the Final Rule notice (see id. at 29641-29644), including re-emphasizing that the Demurrage/Detention rule is not prescriptive and merely provides factors the FMC will consider in any reactive consideration of demurrage/detention disputes.
Additionally, ocean carriers/marine terminal operators lodged numerous other legal and factual disputes with the Demurrage/Detention Rule, as summarized in the Final Rule notice. Perhaps most fundamentally, several commenters disputed the FMC’s primary reliance on the “incentive” principle of demurrage/detention practices, which – while certainly a primary focus of such practices – ignores the “compensatory” aspect of demurrage/detention. However, while the FMC recognizes that there may be a compensatory facet, it ultimately has concluded that “demurrage and detention are not [or should not be] the mechanism by which ocean carriers recover all costs related to their equipment,” nor should there be any penalty/punitive aspect of detention/demurrage. Id. at 29651, 29653. Again, however, because the Demurrage/Detention Rule is not prescriptive, “ocean carriers and marine terminal operators [will still be able to argue] and produc[e] evidence regarding the compensatory aspects of demurrage and detention in individual cases” under 46 U.S.C. §40102(c). Likewise, the FMC stressed that the Demurrage/Detention Rule does not categorically allocate all risk in force majeure scenarios to marine terminal operators/ocean carriers. Rather, keeping with the overall theme of non-prescriptiveness, the FMC will consider compensatory aspects of demurrage/detention practices including in force majeure situations, “e.g., [when] a port is completely closed due to weather, [and the marine terminal operator/ocean carrier] incur[s] costs related to containers and terminal property” as a result. Id. at 29654.
In perhaps one of the most critical aspects of the new rule, the FMC addressed certain comments questioning whether the new Demurrage/Detention Rule would categorically invalidate the industry-standard/rule-of-thumb principle of “once-in/on-demurrage-always-in/on-demurrage.” To summarize, the FMC’s discussion in the Final Rule notice confirms that this principal is not necessarily valid under the Demurrage/Detention Rule. Rather, all aspects of detention/demurrage will be considered under the overarching “incentive” principle without strict regard to the principle of once-in/on-demurrage-always-in/on-demurrage.
As a final critical point of procedure, the Demurrage/Detention Rule provides that the FMC “may consider in the reasonableness analysis the extent to which regulated entities have clearly defined the terms used in demurrage and detention practices and regulations, the accessibility of definitions, and the extent to which the definitions differ from how the terms are used in other contexts.” 46 C.F.R. §545.5(e). Notably, in the prior Notice of Proposed Rulemaking preceding the Demurrage/Detention Rule, the FMC noted that “[t]his factor favors demurrage and detention practices and regulations that make policies available in one, easily accessible website, whereas burying demurrage and detention policies in scattered sections in tariffs would be disfavored.’’ 84 FR 48850, 48853-54 (Sept. 17, 2019). The FMC recognizes in the Final Rule notice that certain commenters voiced valid concern that this factor might improperly conflate or conflict “with the minimum tariff and schedule obligations under the Shipping Act or the [FMC’s] regulations” and “would tend toward a finding of unreasonableness” even for tariffs posted in compliance with the FMC’s rules at 46 CFR parts 520 and 525. Acknowledging this potential friction point, the FMC has stated it will “avoid any interpretation of section 41102(c) [under the Demurrage/Detention Rule] that would be inconsistent with other Shipping Act provisions or [FMC] regulations or that would subject regulated entities to incompatible requirements, [and likewise that the “accessibility”] factor will not be construed or weighed such that compliance with the minimum tariff and schedule obligations …would tend toward a finding of unreasonableness.” 85 Fed. Ref. at 29660. Nonetheless, the FMC reiterated that “providing additional accessibility above and beyond the minimum tariff and schedule requirements would weigh in favor of a finding of reasonableness.” Id.
A full treatment of the Final Rule notice is beyond the scope of this post, but the concepts noted above generally reflect the FMC’s approach under the Demurrage/Detention Rule. It should be noted as well that the Demurrage/Detention Rule strictly applies solely in disputes within the adjudicatory jurisdiction of the FMC – that is, disputes between FMC-regulated entities pursued before the FMC and not in court. See, e.g., Mediterranean Shipping Co. USA Inc. v. AA Cargo Inc., 46 F. Supp. 3d 294, 301 (S.D.N.Y. 2014) (The Shipping Act does not provide for a private cause of action in federal district court; rather, alleged violations of the Shipping Act must be addressed with the Federal Maritime Commission.). Thus, the Demurrage/Detention Rule will not have direct applicability to disputes regarding detention/demurrage involving non-FMC regulated entities, including private marine terminals and non-FMC regulated shippers/carriers. Nonetheless, even in non-FMC disputes, the Demurrage/Detention Rule may provide persuasive, up-to-date, well-supported authority from a highly specialized government agency that may inform demurrage/detention disputes among private entities.
It remains to be seen whether the legal challenges raised by ocean carrier/marine terminal operator commenters in response to the Demurrage/Detention Rule will lead to court action to invalidate the rule. In the meantime, however, the maritime supply chain problems and resulting delays that have arisen during the COVID-19 pandemic (as summarized during a June 5 Congressional hearing) may well give rise to disputes triggering the FMC’s new Demurrage/Detention Rule, sooner rather than later.