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Pricing Demurrage and Detention

The U.S. Federal Maritime Commission (FMC) issued a proposed rule to promote “just and reasonable” (i.e., fair) demurrage and detention charges. (Image: Jim Allen/FreightWaves)

What are we to make of the decision on Sept. 6 by the U.S. Federal Maritime Commission (FMC) to try to promote “just and reasonable” (i.e., fair) demurrage and detention charges? These are charges assessed by ocean carriers and ports against consignors and consignees of ocean freight. Who is to say what fair is? Apparently, it will be FMC regulators using findings from the notice of proposed rulemaking (NPRM) announced on Sept. 13. Certainly the FMC is the regulatory interpreter of the U.S. Shipping Act (1984). The act’s two pillars are nondiscriminatory regulations and providing an efficient transportation system. The first pillar is supposed to constrain the regulators and the second is supposed to mandate them to promote efficiency. More on efficient ahead. 

The FMC’s interpretation of what is a fair rule on demurrage and detention was issued on Sept. 13 and, under the NPRM, the public will have a chance to comment on it through Oct. 17. Discussing rules before implementation is definitely a good thing. But is fairness something that really can, let alone should, be regulated within today’s vast and complicated ocean freight market? 

The complaints that took the FMC to this point reached a peak in 2016 when the Coalition for Fair Port Practices (which represents thousands of U.S. shippers) petitioned it for regulatory relief. The FMC listened. Hearings revealed testimony of increases in charges that, according to the shippers, could not be validated. If disputes arose, the shippers found no clear dispute settlement mechanism to provide guidance when contacting the carriers. These are definitely problems in the marketplace, but they are contractual problems rather than regulatory ones. At best the FMC should provide guidance and not rules. 

Apart from which side of the freight market has a louder voice, or more political clout, is it possible to take an objective view in rulemaking? Yes, if we consider the following question: Should we leave demurrage and detention charges to the market or would the market become more efficient if the FMC could establish a rule or rules for carriers and ports to follow? Notice my use of the world efficient rather than fair. Efficiency is an objective term, while fairness is always a subjective one (i.e., like beauty being in the eye of the beholder). Efficiency, being simply defined as more output for a given quantity or dollar value of inputs, can be standardized and more easily measured. Fairness, on the other hand, cannot because each beholder has his own personal measure. I think it is also fair (pardon the pun) to say that both sides of the ocean freight market would like to see it become more efficient.

For now, the FMC seems to feel that demurrage and detention charges tend to create unfair costs or burdens on consignors and consignees. Technically, demurrage refers to the cost borne by a port when an import container has been delivered off the dock by the ocean carrier and it languishes in the terminal yard. This terminal space is valuable and when the port is tied up providing extra security or dealing with the congestion of getting into and out of the terminal yard these costs are not insignificant, especially at the major ports like L.A. and Long Beach. The ocean carrier, being a legal party to the ocean bill of lading, is expected by the port to collect the demurrage charges from the consignor. 

Detention, on the other hand, refers to the cost borne by the ocean carrier when the consignee, having duly received the import container and its contents, holds onto the empty container beyond the allotted number of days before returning it to the vessel at port. The ocean carrier (which owns the container) would assess to the consignee a detention charge for the cost of not having its property returned so that it could either load it with export freight or empty backhaul it to where the next consignor has a shipment awaiting. 

So, the issue is not that a consignor or consignee has caused financial harm to an ocean carrier and/or a port; it is how to assess an appropriate charge for it. Obviously, the carrier needs to be able to show that the consignor or consignee was negligent in respecting allotted times. A force majeure (e.g., severe weather) ought to relieve either of them from an accusation of negligence. Also, allotted times need to be agreed to and spelled out in the ocean bill of lading, which is the legal contract of carriage signed by the consignor and the carrier. 

On the other hand, the consignor ought to insist on language in the bill that absolves him if, say, heavy traffic congestion prevents timely delivery or pickup. The consignee (as the importer) may need to ask for similar representation from the consignor (who is, in effect, the seller/exporter of the freight). The tricky bit here is that the consignee is not a party to the bill of lading. So carriers have an incentive to work with their consignors to, likewise, work with their consignees to keep the market as efficient as possible. As an aside, if the importer bought the goods from abroad and arranged for transportation as well, then he becomes both the consignor and consignee.

The optimal charge is an amount to make the carrier and/or the port whole. Demurrage should cover the port’s cost of dealing with a languishing container plus some punitive fee (agreed to, of course, and written into the bill of lading). Detention should cover the carrier’s cost of not having its container when expected (which includes the opportunity cost of a revenue load foregone or the inconvenience of having to find another one when the container is finally returned). 

The FMC’s “interpretive rule” seeking to promote standardized language on demurrage and detention is fine. In a related area, Incoterms, as a form of standardized commercial language, has served the transportation industry well. Of course, the parties ought to be able to use whatever language they wish in their bill of lading. But if the FMC uses “interpretive rules” to get into the business of suggesting appropriate allotted times, types of evidence constituting overcharging and how to settle disputes, it will find itself in an extra-legal quagmire. Let the parties figure it out on a contract-by-contract basis and let them take it to the courts if the dispute cannot be resolved.

There is no denying this process is complicated. Other actors playing roles in these disputes include the trucks or rail carriers that move the containers into and out of the ports and any non-vessel-operating common carriers (NVOCCs,) which might be an intermediary between the ocean carrier and the U.S. importer. But if we keep our eyes on efficiency — that is, keeping the containers moving safely and securely — as opposed to fairness, all parties may find it easier to work together (i.e., to negotiate and write better contracts) as opposed to independently lobbying the FMC to choose sides.


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Darren Prokop

Darren Prokop is a Professor of Logistics in the College of Business and Public Policy at the University of Alaska Anchorage. He received his Ph.D. in economics from the University of Manitoba in 1999. Prior to his academic career Darren Prokop worked in government as an economist and in the private sector in inventory planning.