Demurrage here means any charge assessed against containerized cargo for the use of the space in the carrier’s designated facility as occupied by the containerized cargo. (This is distinct from detention which is a fee for use of the container – not the space it sits on.) Demurrage fees are encountered on export containers when they are delivered by the shipper outside of the normal receiving window or when they remain on dock longer than expected, for example after failing to load to the intended voyage at the request of or as caused by the shipper. More commonly, we encounter the assessment of demurrage fees on import containers, where they are assessed on containers that remain on the terminal, uncollected, beyond the allowable free time period.
In June of 2022, just as years of complaints from the shipping public over unreasonable demurrage billing practices reached a booming crescendo, the Ocean Shipping Reform Act of 2022 (OSRA2022) became law. Within that law, the Federal Maritime Commission (FMC) was obligated to initiate a rulemaking on demurrage billing practices, including a determination of which parties may appropriately be billed. To fulfill this obligation, the FMC issued their Notice of Proposed Rulemaking (NPRM) under Docket No. FMC-2022-0066 in October of 2022. In the NPRM, it is stated that “A properly issued invoice is a demurrage… invoice issued… to the person for whose account the billing party provided ocean transportation or storage” and that “This person must have contracted with the billing party for the carriage or storage of goods and is therefore responsible…” and that “A billing party cannot issue an invoice to any other person.”
There’s an awful lot to unpack there, including the intended meanings of “for whose account” and “contracted with” as used in the proposal. And truly, at this point in the rulemaking process while we await a publication from the FMC after their review of an astounding number of submitted comments, we do not yet know for certain how these phrases are meant to be interpreted. We will here dive into some possible options and whittle away until we get to the answer to our question, who should pay for that?
And to be clear, identifying the appropriate billable party for demurrage in no way precludes that party from having their agent – possibly a customs broker or a forwarder or a trucker – from either receiving those demurrage invoices or remitting those fees or both - on behalf of the billable party. Nor does it preclude someone who incurs those demurrage fees from taking steps to recoup all or part from a business partner whom they feel has created the situation that caused the expense, just as similar such things are addressed every day in any number of business transactions. This is solely about defining the party who is responsible to the billing party for demurrage fees.
In the FMC’s NPRM, the phrase “for whose account” is not fully transparent but decades of industry practice lend it to specific interpretation.
When import cargo remains uncollected beyond the expiration of any free time period and incurs demurrage charges, it is appropriate to interpret that the storage being provided is “for the account” of the party to whom the ocean carrier makes the cargo available for collection, the consignee. This practice considers that the consignee is the party, under the terms of the bill of lading, who is obligated to the carrier to collect or receive the cargo and who will necessarily be required to accomplish, or cause to be accomplished, certain requirements, such as customs clearance formalities, payment of collect freight charges and surrender of any negotiable bill of lading, in order to earn that cargo release.
When origin export demurrage is incurred, it is appropriate to interpret that the storage being provided is “for the account” of the party from whom the ocean carrier has received the cargo, the shipper. This practice considers that the shipper is the party, under the terms of the bill of lading, who is obligated to the carrier to tender or deliver the cargo within the receiving timeframes as communicated by the carrier and who will necessarily be required to accomplish, or cause to be accomplished, certain requirements, such as export customs formalities, submission of bill of lading instructions or other mandatory documents, in order to enable the cargo received at the carrier’s designated facility to load to the conveyance.
Because you might be wondering, I will mention that the involvement of a non-vessel operating common carrier (NVOCC) in a shipment does not change this premise; if the NVOCC is listed as the shipper or the consignee on the ocean carrier (VOCC) master bill of lading, then they assume the obligation to ensure cargo moves timely and they assume the liability for origin export or destination import demurrage charges when incurred, regardless that they are not the cargo owner. The NVOCC should therefore receive any demurrage invoice from the VOCC. We can also understand that the NVOCC will similarly hold the shipper or consignee on their house bill of lading responsible for any demurrage charges. While this is likely to be handled as a “pass-through” of the VOCC charges, that need not be the case. In fact, the NVOCC has the ability to charge demurrage according to different terms or amounts as may have been agreed between them and their customer. Further, if it is actually the behavior of the NVOCC that causes or contributes to the VOCC’s assessment of demurrage charges, the NVOCC maintains the ability to honor their obligation to the VOCC without the need to pass those fees on to their consignee inappropriately.
As described, the consignee and the shipper, respectively, are the appropriately billable parties for import destination and export origin demurrage not only because of decades of practice that have proven this to be reasonable, practical and effective in the course of international trade, but also because this properly supports the FMC’s thoughtfully reached statement in their Discussion of the Proposed Rule that “the person with the most knowledge about the shipment and who is in the best position to understand and dispute the charge” is the recipient of the invoice. Regarding demurrage charges, it will be the import consignee or the export shipper who is aware of the facts of the transaction and will be able to recognize and accept billed charges as reasonable and valid or not.
The meaning of the further qualifier in the FMC’s proposed rule that the party “must have contracted” for those storage services is also unclear. Both the shipper and the consignee are parties to the contract of carriage that is the bill of lading and, if that meets the intended criteria set forth in the proposed rule by the term “contracted for”, there is no conflict. However, as inferred from various points in the Discussion document, if this qualifier is meant to limit the recipient of a demurrage invoice to a party that has entered into a Service Contract with the ocean carrier for the subject move, then that qualification should be stricken from the proposed rule for potentially conflicting with the more appropriate identification of the billable parties as described above. Here’s why:
First, not every shipment moves pursuant to a Service Contract, making the rule as proposed impossible to implement.
Second, of the Service Contracts in use, there are relatively few (and, after the recent disastrous period of port congestion, there promise to be even fewer going forward) that include exceptional terms for demurrage. This consideration makes elevating the Service Contract holder as billable party paramount for demurrage even less sensible.
Next and perhaps more importantly, let’s keep in mind the impetus behind OSRA 2022 and recognize that complaints from the shipping public about demurrage charges related to the assessment of fees for periods of time where the mandated incentive principle was not being followed by the billing party, that is, where cargo was billed demurrage despite circumstances beyond the control of the cargo owner and when no amount of incentivizing fees would have been able to expedite the container movement. For example, when a marine terminal was closed to gate activity or when a container was physically unavailable to be released to the receiver because of a congested terminal yard or when appointments were not sufficiently available to permit a consignee to collect their container from a terminal within the free time period, the assessment of demurrage fees was deemed unreasonable. Failure of an ocean carrier to honor specially agreed free time or demurrage fees from a Service Contract was not the point of contention and presumably any invoice that might have been erroneously issued without considering some unique contract terms would have been promptly corrected without issue once identified. Therefore, the idea that a billing practice that would place a Service Contract holder, on basis of their direct knowledge of any exceptionally contracted demurrage arrangements, above the party who has responsibility for and intimate knowledge of the facts of the transaction, will surely not address the persistent concerns of the shipping public nor will it improve upon failures in the existing billing and dispute practices.
Lastly, the timing and mechanics pertaining to the payment process for demurrage charges, which accrue daily, do not lend themselves to any structure that envisions a billable party that is not reasonably local to the event (operating in the same country) or is not a party with some ability to address any obstacles in order to expedite the container movement. Imagine an import shipment that has moved on a freight prepaid basis pursuant to a Service Contract between the shipper at origin and the ocean carrier. Suppose the consignee were delinquent, for whatever reason, in collecting their shipment but is now ready to organize the collection – only to find that they must wait for a demurrage invoice to be generated to their overseas seller and for that invoice to be satisfied – while charges continue to meanwhile accrue against that overseas party who will certainly expect to be reimbursed by their consignee customer and may also have little sense or understanding of the urgency to arranging payment of the demurrage invoice. While such an arrangement may be appealing to the billing party who will inevitably generate additional demurrage revenue thanks to the inherent delays in the process, the impracticality for shippers and consignees is staggering.
Identifying a Service Contract holder as the responsible billable party has no practical basis, will not reduce the incidence of demurrage fees being assessed and will not expedite container movement through our ports. While some ocean carriers and terminal operators may have strayed from decades of proven process in recent years as they sometimes take a “shotgun approach” to sending out invoices, I believe that the industry is best-served by returning to basics with regard to identifying the correct billable party. In my submitted comments in response to the NPRM, I proposed the following definitions:
Billable party for origin demurrage means the appropriate person to receive the origin demurrage invoice and who, under the terms of the bill of lading that is the contract of carriage, is the Shipper and has tendered the loaded export container to the ocean carrier.
Billable party for destination demurrage means the appropriate person to receive the destination demurrage invoice and who, under the terms of the bill of lading that is the contract of carriage, is the Consignee responsible to receive the loaded import container from the ocean carrier.
According to recent reports, we should expect to see an announcement on this subject from the FMC – perhaps in the form of a final announcement of a rulemaking – around June 2023. Let’s stay tuned and be sure that it is a rule that will protect importers and exporters from unreasonable demurrage billing practices for once and for all!
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