The Newest Rule on Demurrages and Detention Will Likely Burden Many Ocean Carriers and Marine Terminals (MTOs)

June 5, 2020

Types : Alerts

After more than seventeen months of fact finding and interim reports, and another eight months of the Notice of Proposed Rulemaking (“NPRM”) process, on May 18, 2020, the Federal Maritime Commission (“FMC”) issued Docket No. 19-05, Interpretive Rule on Demurrage and Detention Under the Shipping Act (“Rule”) effective immediately. (See, Interpretive Rule on Demurrage and Detention Under the Shipping Act, 46 CFR Part 545). This rather lengthy Rule set forth the FMC’s interpretation of the law, 46 U.S. Code § 41102(c), which provides that “[a] common carrier, marine terminal operator, or ocean transportation intermediary may not fail to establish, observe, and enforce just and reasonable regulations and practices relating to or connected with receiving, handling, storing, or delivering property” within the context of demurrage and detention charges.

The Recent History of Demurrage and Detention

To understand why the Rule is a welcome change for shippers and transportation intermediaries, but not so much for ocean carriers and Marine Terminal Operators (“MTO”), we should recall the history of the detention and demurrage conflicts. A brief historical review gives important context to how demurrage and detention policies and practices have impacted and will continue to impact the relationship between the carriers and MTOs and the shipper and truckers.

For many years, U.S. shippers, importers, exporters, and other transportation intermediaries have complained both privately and publicly about the demurrage and detention polices imposed by ocean carriers and MTOs. The complainants argued that the ocean carriers and MTOs were utilizing these charges as a revenue stream instead of a means to ensure fluid movement of containerized shipments. These complaints grew louder as free time (i.e., the period of time offered by the ocean carriers and MTO for use of the container or terminal space without incurring demurrage or detention) grew shorter and the charges grew higher. However, the FMC stayed away from directly addressing these developments in favor of permitting parties to commercially negotiate demurrage and detention terms.

The second half of 2014 created a perfect storm for change in demurrage and detention practices. Ships were getting bigger (8,000 TEU+ was big at the time) and carrier alliances were becoming ever popular. Many marine terminals were becoming overwhelmed by more frequent arrivals of bigger ships with more containers and chassis availability became a serious problem. For one, too many shippers were using up their allotted free time and delaying the restocking or relocating of chassis to locations in need which contributed to the shortages. Carriers were also leaving the chassis ownership business and were selling their chassis to chassis pool service providers. During this transition period, the pools had to figure out the best utilization and optimization of such a large number of chassis, which further exacerbated the chassis availability problem. Ocean carriers and MTOs, along with the chassis pool providers, went on to reduce the free time in order to improve the equipment usage rate and to compensate for their commercial losses. Lastly, at around the same time, laborer unions, which represented workers at nearly all of the U.S. West Coast marine terminals, were exercising their leverages in contract negotiation via terminal operation work-stoppages and slowdowns. This worsened the fluid movement of containers and chassis to and from the marine terminals.

All of these problems resulted in increasing demurrage and detention to shippers and truckers. Shippers and truckers requested that the ocean carriers and MTOs waive, or reduce, charges claiming that they arose out of operational problems beyond the shippers and truckers’ control. However, many carriers and MTOs only agreed to do so in limited circumstances and for a few select customers. In many ways, carriers and MTOs were viewed as inflexible and apathic to the situation.

Consequently, many shippers and intermediaries began sharing their discontentment with the FMC regarding carrier and MTOs’ free time, demurrage, and detention practices. In 2015, the FMC responded to the complaints with a relatively short study and report on the complicated topic, but the resulting study did not have much impact on industry sentiment or changing demurrage and detention practices.

In August of 2016, however, Hanjin Shipping filed for bankruptcy. The loss of the seventh largest container carrier significantly disrupted the general supply chain and further compounded the problem of container and chassis availability and the returning of equipment.[1] In December 2016, many angry shippers, intermediaries, and truckers formally petitioned the FMC to adopt a rule making it unjust or unreasonable, or even unlawful, for ocean carriers and MTOs to charge or collect demurrage or detention in certain situations.

The 2016 petition led to the FMC commencing a formal factfinding investigation, led by Commissioner Rebecca Dye, and an Interim Report in 2018 that essentially set the foundation for the Final Rule. The Interim Report identified that the demurrage and detention income of shipping lines in the U.S. increased 90% in 2014 compared to 2013, followed by an additional year-on-year increase of 86% in 2015, dropped 23% in 2016, and then rose again by 30% in 2017.[2] Although the Interim Report acknowledged the recent years of economic struggles for ocean carriers, the commercial necessity of demurrage and detention penalties, and uncontrollable forces (e.g., weather and labor/union disputes) at play,[3] these factors were not enough to slow the momentum of the inevitable revision to the legal framework for demurrage and detention.

The FMC summarized the conflicting sides as “importers, exporters, transportation intermediaries, and truckers, large and small, and their trade associations, from across the United States [which] were generally in support of the proposed rules… In contrast, ocean carriers, MTOs, chassis lessors, and cooperative working agreements of ocean carriers and MTOs opposed the rule by claiming that FMC are generally opposing the same.”[4] The carriers and MTOs argued that the FMC lacked authority for such a Rule and that the proposals would be costly, burdensome, and unfair.[5] Ultimately, the FMC devoted a significant portion of the Rule refuting the oppositional views raised by ocean carriers and MTOs and reiterating the non-exclusive list of factors to consider when assessing the reasonableness of demurrage an detention practices under 46 U.S.C. 41102(c) and 46 CFR 545.4(d).[6]

Overview of the Rule

The Rule is the FMC’s interpretation of “just and reasonableness” as set out in 46 U.S. Code § 41102(c). In its interpretation, the FMC created and relied on a new concept: the Incentive Principle. According to the FMC, this Incentive Principle meant considering the extent to which demurrage and detention serve their purposes as financial incentives to promote freight fluidity.[7] An ocean carrier or MTOs’ policies or practices imposing demurrage and detention when such charges are incapable of incentivizing cargo movement, such as when a trucker arrives at a marine terminal to retrieve a container, but cannot do so because it is in a closed area or the port is shutdown, may, thus, be unjust or unreasonable.[8] To put it another way, reasonable demurrage or detention must incentivize cargo movement. This is a significant change to assessing detention or demurrage charges because many, including FMC, previously understood demurrage and detention to be purely penal in nature.[9]

Out of many non-exclusive factors that the FMC have listed, four major factors may determine the reasonableness of demurrage and detention under the Incentive Principle:

  • Actual availability of cargo for retrieval. Did the carrier and/or MTO give fair opportunity to the shipper or trucker to retrieve the container? While the FMC did not define what “actual availability” means, it warned against counting against free time when shippers or truckers cannot pick up cargo because of cargo unavailability.[10]
  • Space availability for an empty container return. Did the MTO act reasonably in conditioning or rejecting an empty container return move? Did the carriers act reasonably when the container could not be readily returned? As an example, the FMC raised a concern for the reasonableness of dual move requirements, or more specifically, an ocean carrier imposing detention when a trucker’s inability to return a container within free time is due to it not being able to satisfy a dual move requirement.[11]
  • Notice of cargo availability. Did the carrier or MTO give timely notice that cargo was available for pickup? Although the FMC backed off from requiring specific notice requirements (e.g., a ‘‘push notifications’’ for electronic notice and change of container availability or “appointment guarantee”), it reminded ocean carriers that they have a contractual, as well as a statutory, obligation to provide reasonable notice and opportunity to retrieve the container.[12]
  • Government inspections. The FMC acknowledged that the carriers and MTOs suffer costs in the case of government inspections and cited a case finding that “ocean carriers are not required to extend free time to account for government inspections of cargo.” Whether demurrage and detention in these cases is reasonable will depend on whether it is serving the Incentive Principle.[13]

Additional factors affecting the reasonableness of demurrage and detention policies discussed by the FMC included “clear and definite” accessible detention and demurrage terms, fair dispute resolution terms that do not hastily resort to a “shut-out” option, reasonable ocean carriers and MTOs billing practices, and the consistent application and collection of the charges. The factors are not exclusive and the FMC stated that the Rule would not prevent the consideration of additional factors and arguments when assessing the reasonableness of demurrage and detention. Notably, the FMC specifically used the term “extenuating circumstances” as a “fairness” qualifier. An example given by the FMC as an extenuating circumstance is whether the shipper or trucker has itself complied with its responsibilities, especially regarding cargo retrieval (e.g., making appointments, paying freight, submitting paperwork, and retaining a trucker).[14]

Challenges Facing Carriers and MTOs

The challenges now faced by ocean carriers and MTOs can be quite different for demurrage when compared to detention. When it comes to demurrage, many problems can be mitigated by timely notice and appointment of arriving cargo, but timely notice and appointment may fall short of carriers’ and MTOs’ need to address and resolve cases such as shippers abandoning cargo for commercial reasons, disputes over cargo ownership among multiple cargo interests, or complicated accident cases which delay cargo pick up. In many of these cases, the containers cannot be left unclaimed at an already overcrowded marine terminal and the demurrage and increased costs ensue regardless of whether the container is left alone or moved to a private depot.

The issues surrounding detention tend to be more complex, such as disputes over cost allocation and apportionment. For example, due to capacity and operational issues, marine terminals can change its empty container return policy on any given day (even several times a day) without advance notice to the truckers. A sudden change of the return policy often forces truckers to return to origin on a dry run (i.e., the trucker will have carried an empty container from origin to the terminal only to return to origin with the same empty container). Dry runs cause immense frustration and a waste of time from the trucker, the shipper, and ocean carriers and the MTOs. Depending on the situation, the chassis usage fee may fluctuate on a daily basis and the cost adds yet another wrinkle to these complicated detention cases. If the MTO rejects the dropoff of an empty container, the trucker is often stuck with the cost of the chassis and the cost of storing/holding on to the equipment.[15]

MTOs exercise the most, if not all, the control over the operating of the equipment moving in and out of its terminal. This means that MTOs have an important role in bringing demurrage and detention practices into accord – just as it was with the industry’s compliance with Verified Gross Mass[16] (under the VGM rule, shippers were required to verify and declare/certify the weight of all containers before they are loaded onto vessels). As long as MTOs are directly in control of discharging, releasing, and receiving containers, they continue to hold the key to improving operational fluidity of freight as required under the Rule for demurrage and detention practices to be just and reasonable, but it remains to be seen how much change can be expected from MTOs, many of whom are already overwhelmed by the ever growing vessel size and container volume.

Furthermore, the UIIA likewise will not shield ocean carriers who fail to take affirmative steps to ensure just demurrage and detention.[17] The FMC cautioned that “[it] cannot simply assume that the processes outlined in the UIIA sufficiently address concerns about the ocean carrier detention practices vis-à-vis truckers… To the extent UIIA terms or conditions are relevant to determining the reasonableness of particular detention practices, nothing precludes parties from raising these issues in individual cases.” [18] Ocean carriers and MTOs will need to work together on a regular basis to address problems and to find more practical solutions. The FMC clearly noted that “[a]lthough ports and terminals do not control the contractual relationships between cargo interests and shippers, and thus the free time a carrier offers its customers, they can negotiate with carriers about the demurrage and free time policies of the ports and terminals vis-à-vis carriers.”[19] Ocean carriers cannot simply point the finger and shift the blame to MTOs.

The challenges remain for ocean carriers and MTOs to balance (at times clashing) their operational needs and economic/commercial needs and to create a practical contractual arrangement and operational protocols that are visibly “just and reasonable” and based on the Incentive Principle.

Now What?

It is important to recognize that ocean carriers have struggled in recent years with the commercial challenges in an environment of intense competition, increasing regulations, increasing costs, and lower and lower freight rates and revenue. Marine terminals similarly have struggled under the pressure of increased automation, increased labor costs, and the need for increased terminal capacity to host larger vessels. Both ocean carriers and MTOs have tried to meet these challenges by, inter alia, reducing costs and minimizing operational expenses.

Adding to these challenges, the Rule has now given ammunition and teeth to the shippers and truckers who are increasingly willing to take on the ocean carriers and MTOs regarding their demurrage and detention practices, whether it is before the FMC or in civil litigation.

In the short term, ocean carriers must regularly review their operational contract terms and tariffs to eliminate or revise practices that shift an unfair risk or burden to the truckers and ensure that any policies are visibly just and reasonable. Demurrage and detention policies should be: (1) clear and consistent; (2) objectively fair and not punitive; (3) designed to “incentivize fluidity” of freights and containers; and (4) setup for recordkeeping and retention of relevant communications in problematic cases, especially when extenuating circumstances exist. Notices of accruing detention and demurrage should also be frequently and timely communicated. In interacting with shippers and truckers, ocean carriers and MTOs should also ensure that notices of container availability are given in a timely manner for pickups and empty container returns. The inclusion of stop-the-clock clauses can also be an effective when confronting a tricky detention or demurrage situations.

On the other hand, MTOs should consider expanding their operational options, especially when space is an issue, by enticing other beneficiaries to share the cost of such accommodation or feasible options. Reasonable alternatives should be offered when terminal space is limited (e.g., having alternative dropoff locations at a shared cost between the MTOs and truckers).  However, MTOs also must be prepared to play defense because their operational protocols and decisions are likely to be blamed for unjust or unreasonable demurrage and detention. MTOs must take care that their Electronic Data Interchange (EDI) and communications are prompt and fair whenever there is a change to policies governing container movement and the dropoff or pickup of containers.

The overall sense of the Rule is that, despite the FMC’s interpretation, determining “reasonableness” still requires a fact intensive and case-by-case analysis balancing the causes, faults, and justifications of shippers and truckers with those of carriers or MTOs’. Although the initial burden in a formal adversarial proceeding begins at the shipper or trucker level, the Rule quickly shifts the burden to the ocean carriers and MTOs to overcome the “presumption of unreasonableness by demonstrating the reasonableness of assessing the charge in the situation.”[20] The ocean carriers and MTOs must prove that their policies incentivized cargo movement and that the involved ocean carrier(s) and/or MTO(s) acted without any fault or under provable extenuating circumstances. In effect, the carriers and MTOs no longer have the same leverage, such as their ability to exercise a lien on the cargo or even to shut out the shippers and truckers, when their demurrage and detention policies were unchallenged.

[1] When Hanjin Shipping Co., Ltd. (then the world’s 7th largest ocean carriers filed for bankruptcy in August 2016, one of the challenges for many shippers and intermediaries, particularly in the Southern California region, was finding space and capacity to return the empty Hanjin containers.


[3] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29640

[4] The FMC acknowledged that more than a hundred comments were received, out of which “approximately 60 commenters expressly supported the proposed guidance, and another 20 commenters supported the proposed guidance implicitly or in part.” (Footnote 33 of the Rule, 46 CFR Part 545).

[5] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29641

[6] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29639

[7] 84 FR at 48855.

[8] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29651

[9] Fact Finding NO. 28 – Final Report p. 28

[10] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29654.

[11] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29655.  A dual move refers to a move that a trucker has to perform (two moves) at any given entry into the container terminal – e.g., the trucker must bring in a loaded container or empty container, and leave with another loaded or empty container.  This is to ensure that the terminal does not end up with an unbalanced or unreasonable number of containers sitting in their terminals.  Many terminals now require appointment system and the dual move to mitigate their operational issues.  It is notable that at times, the trucker has to do a ‘triangular move’ in which the trucker has to go to one terminal to pick up a bare chassis and go to another terminal to pick up the loaded container.  The FMC did not really clarify whether such dual or triangular moves requirement is unreasonable.

[12] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29656

[13] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29659

[14] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29647, 29650

[15] In the event that trucker successfully claim that a carrier or a MTO’s detention or demurrage policy or practice is unreasonable and unlawful, the carrier and/or the MTO may be liable for such additional charges/damages.

[16] In January of 2014, IMO (International Maritime Organization) by way of SOLAS (Safety of Life at Sea) Convention required the overall weight of all containers to be loaded onto a shipping vessel to be declared before the shipment is loaded.  With many players involved, there was no way to effectively implement this without the meaning participation of the MTOs even though it probably had the least legal responsibility under the law.

[17] The UIIA (the Uniform Intermodal Interchange & Facilities Access Agreement) is “a standard industry contract that governs the interchange of equipment between intermodal trucking [and drayage] companies and equipment providers such as ocean carriers, railroads and leasing companies.”

[18] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29649.

[19] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29651

[20] Federal Register / Vol. 85, No. 96 / Monday, May 18, 2020 / Rules and Regulations 29643.



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