FMC Issues Final Interpretive Rule on Demurrage and Detention
- The Federal Maritime Commission (FMC) issued its final "Docket No. 19-05, Interpretive Rule on Demurrage and Detention Under the Shipping Act," effective upon its publication date of May 18, 2020. The Final Rule applies to practices and regulations relating to demurrage and detention for containerized cargo.
- The FMC largely stuck to the language of the Proposed Rule issued in September 2019 — including the FMC's view and application of the "Incentive Principle" — but in response to public comments, the FMC revised and clarified certain provisions.
- The FMC's new framework for detention and demurrage practices has substantial compliance implications for ocean carriers and marine terminal operators — both to evaluate current policies and practices that could potentially be deemed improper, as well as to assess alternative practices better tailored to the new interpretive guidance.
The Federal Maritime Commission's (FMC) final rule "Docket No. 19-05, Interpretive Rule on Demurrage and Detention Under the Shipping Act" (Final Rule), which took effect on May 18, 2020, after being published in the Federal Register, is the most recent iteration of the FMC's regulatory focus on demurrage and detention practices at U.S. ports.
In response to a Dec. 7, 2016, formal petition, the FMC initiated FMC Fact Finding 28 on March 5, 2018. Commissioner Rebecca Dye released an interim report on Sept. 5, 2018, and a final report on Dec. 7, 2018 (See Holland & Knight's previous alert, "FMC Commissioner Issues Final Report for Fact Finding 28," Dec. 11, 2018). On Aug. 27, 2019, Commissioner Dye submitted recommendations to the FMC, including that the FMC publish an interpretive rule clarifying how the FMC will assess the reasonableness of detention and demurrage practices. The Notice of Proposed Rulemaking (NPRM) was issued on Sept. 13, 2019. (See Holland & Knight's previous alert, "FMC Approves Dye's Recommendations on Detention and Demurrage, Issues Proposed Interpretive Rule," Sept. 17, 2019). A pre-publication version of the Final Rule was issued on April 28, 2020.
The FMC's proposed interpretive guidelines in the NPRM placed primary emphasis on the FMC's view of the "Incentive Principle" — that demurrage and detention practices function to incentivize cargo flow — and provided many examples of potentially unreasonable regulations or practices. As more fully discussed in Holland & Knight's prior alert on the NPRM, application of the guidelines and examples would potentially involve significant custom tailoring, uncertain flexibility in policies or their application, and could ultimately have significant impact on existing contractual relations.
Changes in the Final Rule
The FMC reported that over 100 comments were received in response to the NPRM. The FMC responded favorably to some comments, but in general stuck to its proposed language.
In response to jurisdictional and procedural comments about the binding nature of the Final Rule, the FMC reiterated that as an "interpretative" rule, the Final Rule does not mandate conduct but rather gives guidance on how conduct may be interpreted in future adjudications. Indeed, the FMC added some protective language that the guidance is "a non-exclusive list of factors the Commission may consider" and added a catch-all "non-preclusion" provision to clarify that nothing in the Rule would prevent the FMC from considering additional factors and arguments in individual cases when assessing the reasonableness of demurrage and detention practices. In addition, the FMC added an "extenuating circumstances" qualifier regarding the application of the rules on empty containers and government inspection policies. The FMC also included commentary in its discussion that, in certain respects, compliance with existing minimum standards would not weigh against a party, but compliance with more of the guideline factors would weigh favorably. How the non-preclusion elements of the Final Rule will apply in practice and in adjudications remains to be seen.
Considerations and Takeaways
Interpretive guidance and "non-preclusion" language notwithstanding, ocean carriers and marine terminal operators, as well as other regulated entities, will need to reevaluate their existing demurrage and detention policies, practices and contractual relations. Indeed, particular consideration should be given to certain practices and policies — such as empty return practices, dual movement requirements, certain practices relating to carrier haulage vs. merchant haulage, and "lock-out" situations — that the FMC highlighted in strong terms. In addition, regulated entities may benefit from giving specific attention to evaluating alternative methods and means of calculating and potentially assessing "compensatory level" charges when conditions might otherwise trigger tolling or suspension of free time under the Final Rule.
Although the Final Rule is not "retroactive," there is no indication as to how those policies and practices in effect prior to the effective date of May 18, 2020, will be evaluated in a future adjudication. And there is no safe harbor or transition period. Prompt attention to current policies and practices is warranted.
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.