White House Makes Enforcement of Rule Against Unjust Detention and demurrage Practices a Priority
During a time of unprecedented demand for capacity due to Covid-19 and the effects of a major pandemic, International Carriers will now also need to be mindful of President Biden’s newly signed Executive Order on July 9, 2021, promoting competition in the American economy that dovetails with a previous Federal Maritime Commission (FMC) issuance of a Final Interpretative Rule on Demurrage and Detention under the Shipping Act published in 2020.
The New Order
The new order enables the FMC to “vigorously enforce the prohibition of unjust and unreasonable practices in the context of detention and demurrage pursuant to the Shipping Act, as clarified in “Interpretive Rule on Demurrage and Detention Under the Shipping Act,” 85 Fed. Reg. 29638 (May 18, 2020)” (the Rule). The FMC just recently signed a MOU with the Department of Justice(DOJ) to work together on this initiative.
While the Rule leaves room for interpretation throughout, there is a clear incentive principle that the Carrier should make themselves familiar with. Part of the incentive principle is cargo availability notifications. These notifications will need to be made in a “reasonable” amount of time for the customer. The agencies could be looking at how the notification is sent, to whom it is sent, and that the language is “effective and consistent”. Carriers will need to be mindful of the language used, consistency, timing, and audience of all of their notifications.
The Carrier’s ability to set free time is also part of the Rule. The Carrier will need to be “reasonable” to all of their customers on how much free time they will be providing and have record keeping to show that they are consistent with how they set their free time before charging.
Unless there are extenuating circumstances, the Rule also allows for practices and regulations on empty equipment returns. In the instance the customer cannot return the container, they cannot be penalized. The Carrier will potentially need to work with their terminal operators to make sure that they are optimizing the customers’ ability to return the equipment.
While the Interpretative Rule happened pre-pandemic, it is clear that this EO is allowing the FMC and the DOJ to continue enforcement and further rulemaking/regulation to streamline the process with the Carrier as to how they will be able to charge per diem and demurrage to their customers and they will need to be mindful that there is a possibility of an audit in the future. The Carrier will need to set forth policies and procedures to outline the manner in which they handle per diem and demurrage at all aspects while the cargo is in their care and custody and keep good record keeping in the instance they come under scope from either the FMC or the DOJ.
Legal Ramifications of The E.O. and Rule on Demurrage and Detention Disputes
The Executive Order means that there may well be further guidance coming from the FMC and/or the DOJ, particularly in regards of enforcement of the Rule given that this is now appears to be an initiative by the Biden administration. In the meantime, Carriers should be familiar the Rule for the latest guidance on detention and demurrage disputes within the jurisdiction of the FMC (meaning disputes between entities regulated by the FMC and hear by the FMC). Further, parties may seek to use the Rule as an authority in disputes outside FMC jurisdiction, even though it is not directly controlling.
Perhaps one of the most of the significant parts of the Rule in terms of disputed claims is the guidance on determining whether detention and demurrage charges are “reasonable,” the standard by which such charges will be judged by the FMC. Broadly, the Rule provides that the FMC will “consider the extent to which demurrage and detention are serving their intended primary purposes as financial incentives to promote freight fluidity.” Specifically, several factors will be analysed many of which were discussed above: 1.) the extent to which demurrage practices and regulations relate demurrage or free time to cargo availability for retrieval; 2.) generally, 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; 3.) Notice of cargo availability as mentioned above; 4.) in relation to government inspection, the extent to which demurrage and detention are serving their intended purposes and may also consider any extenuating circumstances. While these represented the listed factors, other relevant factors may considered as well.
Clarifying and formalizing the demurrage and detention procedure in some sense should help avoid disagreements and formal disputes before the FMC. At the same time, it will also put the burden on the Carrier to prove that they have met the reasonable standard set forth in the Rule, so it will make it more difficult to support their position when there is a disagreement, if they have failed to meet the standard. At the same time, it could reduce the burden on shippers and others who are disputing demurrage and detention charges. As such, it appears that the enforcement of the Rule by the FMC is aligned with the significant changes called for in the White House’s Order, and given that the E.O. calls for “vigorous enforcement,” Carriers should be prepared for the FMC to do just that.