September 17, 2019

FMC Approves Dye's Recommendations on Detention and Demurrage, Issues Proposed Interpretive Rule

Holland & Knight Alert
J. Michael Cavanaugh | Jameson B. Rice

The Federal Maritime Commission (FMC) in March 2018 directed Commissioner Rebecca F. Dye to initiate a fact finding investigation (Fact Finding 28) into demurrage and detention practices at U.S. ports. Commissioner Dye issued her Final Report on Dec. 7, 2018, concluding that all international supply chain actors would benefit from greater transparency, consistency and reasonableness in demurrage and detention practices. (See Holland & Knight's alert, "FMC Commissioner Issues Final Report for Fact Finding 28," Dec. 11, 2018.)

After her Final Report, Commissioner Dye continued to meet with industry stakeholders to refine her findings and recommendations. On Aug. 27, 2019, the Commissioner submitted recommendations to the FMC, including:

  1. that the agency publish an interpretive rule that clarifies how the Commission will assess the reasonableness of detention and demurrage practices
  2. the establishment of a Shipper Advisory Board to evaluate the implementation of the Fact Finding 28 recommendations and to obtain the advice of American importers and exporters concerning other Commission matters
  3. continued support for the Supply Chain Innovation Team working to address chassis availability issues in Memphis

The FMC unanimously approved the Commissioner's recommendations on Sept. 6, 2019.

Notice of Proposed Rulemaking

With respect to detention and demurrage, the FMC issued a Notice of Proposed Rulemaking (NPRM) on Sept. 13, 2019, outlining the specifics of the FMC's proposed interpretative rule. The NPRM is divided into three primary categories:

  1. "Incentive Principle": The FMC's position is that demurrage and detention charges are intended to act as financial incentives to cargo interests to retrieve cargo and return equipment, and may be found unreasonable if they do not achieve this purpose.
  2. "Demurrage and Detention Policies": Policies should be published, include pertinent information conveyed transparently and be reasonable.
  3. "Transparent Terminology": Terms should be used consistent with their standard meaning, and it should be clear what the terms mean.

The NPRM gives many specific examples of what might be considered an unreasonable regulation or practice. Some of these could likely be implemented fairly easily in most circumstances. For example, "starting the free time clock upon container availability as opposed to container discharge" would often not be too hard to implement. Also, clearly defining terminology and drafting clear processes for dispute resolution would not likely be particularly challenging to implement.

However, perhaps the most striking element about the NPRM is how most examples demonstrate the amount of custom tailoring to the circumstances that may be required in order to uphold the reasonableness of a demurrage or detention charge. It is unclear whether this flexibility must be inherent in the detention and demurrage policies themselves, or whether this flexibility could be achieved by not enforcing a policy when the circumstances would render such enforcement unfair. In either event, the FMC has indicated that blanket enforcement of detention and demurrage policies that do not take into account the circumstances of a particular case or that do not work to incentivize cargo flow will not be deemed reasonable.

Commissioner Dye previously noted in her Final Report that there is a complex web of contractual and non-contractual relationships that are unlikely to change due to longstanding commercial practices in the maritime industry. This is why the Final Report focused on areas that in the Commissioner's view would not cause major disruption to maritime commerce, including notice of cargo availability, billing practices, dispute resolution processes and procedures, and terminology.

It appears, however, that the proposed interpretive rule could impact contractual relationships. For example, it would follow from the proposed rule that parties cannot allocate by contract the risk of force majeure or other intervening event to the shipper, a clause that might theoretically result in a lower rate for the shipper. Furthermore, providing adequate free time could allow enough of a buffer to account for complications in picking up cargo or returning containers, and would be easier to administer than the case-by-case analysis that the FMC seems to be requiring.

Those who would like to shape the final rule by telling the FMC how the proposed rule would affect their business have until Oct. 17, 2019, to voice their opinions in comments to the NPRM.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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