The detention, demurrage fee conundrum

The Federal Maritime Commission has yet to determine if entities should receive relief from ocean carriers and terminals assessing free time penalties when the cause of exceeding contracted free time is out of the shipper or intermediary’s control.    There’s little in this world that’s truly black and white, something shippers, intermediaries and drayage providers may want to bear in mind while they wait for the U.S. Federal Maritime Commission to potentially issue a binding policy on the assessment of detention and demurrage fees in extraordinary circumstances.
   The FMC held two days’ worth of hearings on the matter in mid-January, a testament to how thoroughly the agency wants to understand the matter, and how multifaceted the issue is.
   At the end of nearly 10 hours of testimony, there was little indication whether the commission would act on a petition in front of it filed by a broad coalition of associations. The more than 25 entities, which represent shippers, freight forwarders and domestic transportation providers, want relief from ocean carriers and terminals assessing free time penalties when the cause of exceeding contracted free time is out of the shipper’s or intermediary’s control.
   The petition, filed in December 2016, asks the FMC to enact policy to prevent what the coalition called “unfair” assessment of free time-related fees. The problem has reached a head in recent years during times of extreme congestion in U.S. ports, such as during a threatened U.S. West Coast longshore labor strike in late 2014 and early 2015, or in the aftermath of liner carrier Hanjin Shipping declaring bankruptcy in August 2016.
   Cargo owners and trucking companies are normally given a certain number of free days to pick up containers of imported goods from ports after they have been unloaded from ships. After that, they can be charged demurrage, a fee intended to ensure that containers are removed quickly and efficiently. In addition, detention and per diem fees can be charged if the cargo containers and the chassis used to haul them are not returned within a specified time.
   Free time is generally negotiated in ocean freight contracts. Larger volume shippers often have the leverage to negotiate more favorable terms, both in terms of the number of free days and the penalties assessed when free time ends.
   The shippers and their advocates who testified before the FMC said they were not seeking elimination of demurrage and detention fees, only a check on the ability of carriers and terminals to use the fees as drivers of revenue rather than to punish bad actors who use terminal space or equipment improperly.
   Conversely, carriers and terminals testified that they have no interest in assessing fees to shippers due to the competitive nature of the liner industry. They also lamented the idea that they should bear sole risk during periods of intense congestion.

Shipper Objections. The commission heard from shippers on both ends of the size spectrum, including Walmart and the American Coffee Corp., which brings in roughly 2,000 TEUs worth of imports per year.
   The issue has been a long-term thorn in the side of cargo interests, and reached a head in 2014 when congestion related to prickly negotiations between longshore labor and marine terminals wreaked havoc with the flow of containers on the U.S. West Coast.
   The complaints laid out by cargo interests centered around three areas:
     • The lack of uniformity, transparency, and consistency related to free time penalties.
     • The lack of a viable path for shippers and intermediaries, particularly smaller ones, to fight what they consider unfair penalties.
     • The disconnect between the commercial relationship between cargo interests and the marine terminals.
   The last area centered around the reality that terminal operators tend to deal solely with carriers, while carriers are the ones to assess detention and demurrage penalties, a system that prevents cargo interests from developing direct relationships with terminals. The situation is exacerbated, some said, in ports where a single authority controls an entire port complex versus larger, landlord-operated ports where there is at least some competition between terminals.
   But even that competition has dissipated in recent years, as consolidation in the carrier industry means fewer carriers have grouped into bigger alliances. That means it’s harder for a shipper to dictate which terminal its containers move through.
   “Quite honestly, we would love to have a business discussion and leverage our volume,” said Laura Crowe, senior director of global logistics at Walmart. “But our contracts are with the carriers, and the carriers have to negotiate with the terminals. We’ve had situations where carriers have asked us to help them negotiate with the terminals.”
   Crowe said the problem is particularly acute for the retailer in Savannah, Ga., where Walmart has invested heavily in fixed distribution center assets, and where there isn’t competition among terminals.
   “Once I’m locked into a market, [the terminals] have no reason to negotiate,” she said.
   The inability for shippers to effectively dispute what they consider unfair or incorrect charges was also a point several witnesses emphasized. The nature of the size of the penalties—per container or bill of lading—made it hard for cargo interests to justify pursuing time-consuming and costly disputes. In other words, the internal cost or cost to hire lawyers was too big a risk to take in most circumstances. Added together, the costs could be substantial for some shippers, but often still below the threshold of seeking a resolution.
   The witnesses urged the FMC to set up policy guidelines that would, in effect, make it clearer when carriers and terminals have overstepped their bounds in assessing penalties. The guidelines, the panelists argued, would also reorient the concept of detention and demurrage back toward its original intent—to incentivize shippers to quickly evacuate laden boxes from a terminal and quickly return empty equipment.
   “This is something that’s at the discretion of carriers and terminals that has been abused,” said Peter Friedmann, executive director of the Agriculture Transportation Coalition, an association of U.S. exporters. “If they hadn’t abused it, we wouldn’t be there. Carriers and terminals can solve this. They know what’s reasonable and what’s not. They have to police themselves, or the sheriff has to come in.” Setting Boundaries. Multiple speakers said they weren’t asking the FMC to establish strict rules as to the rates carriers could charge and the number of days of free time granted either by port tariffs or within commercial contracts. They instead wanted the FMC to set boundaries for what constitutes unfair business practices.
   “The FMC is uniquely positioned to set guidelines and a common understanding of what is fair and what is not fair,” said Alex Cherin, representing the California Trucking Association Intermodal Conference. “While a commercial solution may seem appropriate, I can tell you we have tried and tried again. Meetings after meetings, some facilitated by ports themselves, this commission. The core practices of charging fees when inappropriate remains. I remain convinced the FMC is the only entity positioned to referee this issue.”
   Some of the testimony during the FMC hearing centered on risk and the assessment of demurrage and detention fees. Cargo interests argued that they shoulder risk in other parts of the supply chain and shouldn’t be ask to bear the burden of events—whether man-made or natural—out of their control.
   “We’re not asking an unfair burden on [carriers and terminals] because we have risk as well,” said Richard Roche, vice president of international transportation at Mohawk Global Logistics and NVOCC subcommittee chairman at the National Customs Brokers and Forwarders Association of America. “We’re asking them to take care of their side and we take care of ours.”
   Roche said his supplier customers take the burden of strict chargebacks from retailers, while truckers take the risk of dry runs and long wait times in port.
   “We don’t charge [the carriers and terminals] because they didn’t perform,” he said. “We don’t need to be penalized for their lack of performance.”
Carrier Conundrum. Testimony from the carriers and terminals focused on a few core ideas, primarily that carriers have little interest in alienating or annoying their customers.
   Terminal representatives, meanwhile, emphasized that they are only involved in assessing demurrage (the excess time containers spend in their facilities), and that it’s critical to maintain a tool to stimulate cargo fluidity through prized dockside space.
   “We’re in intense competition with each other, even within the alliances,” said Howard Finkel, executive vice president of COSCO Shipping Lines (North America). “The last thing you want to be as a carrier is be strict on demurrage in the face of things like serious weather events. It’s hard to get a shipper to sign a contract [if that’s your stance].”
   Both Finkel and Richard Craig, president and CEO of Mitsui O.S.K. Lines (America), said the issue of grievances over excessive demurrage or detention fees was overstated by shippers and drayage providers who testified. Both said that such cases happen, but that they are far from the norm, and don’t merit the FMC taking action to handle something that is currently and best handled commercially.
   Terminal operators also refuted the idea that the commercial gap between beneficial cargo owners (BCOs) and terminal operators is the root cause of the issue.    “We heard yesterday that BCOs don’t have a choice in terminals,” said Ed DeNike, president of SSA Containers. “But there are more terminal operators now that are trying to convince carriers to use their terminals. We’re trying to do a better job, so the carriers want to do business with us.”
   That means that a terminal doesn’t want to be seen dinging shippers for demurrage, if it might drive a shipper away from the carrier that uses that terminal.
   DeNike also disputed the idea that shippers and drayage providers don’t have a relationship with terminals. He said the relationship might not be contractual but that BCOs and their drayage providers interact with the terminals on a daily basis.
   Meanwhile, John Butler, president and CEO of the World Shipping Council, which represents the liner carrier industry, called on the commission to weigh carefully any action that would standardize the application of detention or demurrage fees.
   “There’s a huge difference between the flexibility available in a commercial contract and any official action by the commission,” he said. “Any time you reduce flexibility, you reduce competition. Telling us ‘we’re not telling you that you have to do it a certain way, we’re just telling you what you can’t do’ is in effect the same.”

To Regulate Or Not? The FMC is now left to weigh a tricky question: is the unfair application of detention and demurrage fees the norm in the industry (a revenue stream that often exceeds the cost of the freight rate, as suggested by the petitioning coalition), or are these grievances infrequent and not significant enough of a problem to regulate?
   The commission is down to three commissioners at present after the departures in 2017 of former Chairman Mario Cordero (now executive director at the Port of Long Beach) and Commissioner William Doyle (now executive director of the Dredging Contractors of America).
   As Acting FMC Chairman Michael Khouri put it at the end of the hearing: “Is a problem systemic or episodic? Are there places in between that we need to look at? Where do we step in with a judicious hand to make things better, recognizing that we’re not going to be able to solve all problems?”
   Karyn Booth, a partner at the law firm Thompson Hine, who spoke on behalf of the petitioners asking for FMC intervention, said the breadth of the cargo interests that formed the coalition behind the petition speaks volumes.
   “Listening to carriers and terminals, you’d be led to believe that there’s no problem,” Booth said. “That’s simply not the case. You have a petition filed by 26 organizations. It’s not one company or one association. There are 100 comments in this record. American companies don’t hire D.C. lawyers and take time to come to hearings unless there’s a real problem.”
   There is no set timeframe for the FMC to make a determination on the petition, but a spokesperson said the commission is committed to coming to a decision in a timely fashion.
   “This is a very complex issue that presents difficult choices,” Khouri said in a statement. “The question to be resolved is if the commission, with a judicious hand, can help make things better, though we recognize, we will never be able to solve all the issues associated with the timely handoff of the container from carriers to shippers.”

FMC Petitioners: The 25 members of the coalition that filed the petition are: the American Apparel & Footwear Association; American Chemistry Council; Association of Bi-State Motor Carriers; Association of Food Industries; Auto Care Association; Foreign Trade Association; Green Coffee Association; Harbor Association of Industry & Commerce; Harbor Trucking Association; Intermodal Motor Carriers Conference of the American Trucking Associations; International Association of Movers; Juice Products Association; Juvenile Products Manufacturers Association; Meat Import Council of America; Motor & Equipment Manufacturers Association; National Customs Brokers & Forwarders Association of America; National Pork Producers Council; National Retail Federation; New York/New Jersey Foreign Freight Forwarders and Brokers Association; North American Meat Institute; Retail Industry Leaders Association; Tea Association of the USA; National Industrial Transportation League; Transportation Intermediaries Association; and U.S. Hide, Skin and Leather Association.