Brewing Container Delay Disputes: When Will the Pandemic’s Impact on Shipping Loosen Its Grip?
Last December, in an article in this column entitled “Time is Money: Allocating the Cost of Maritime Delays,” I provided, among other things, an overview of container demurrage and detention delays emanating from the pandemic’s impact on the maritime-supply chain. Since then, Congress enacted and the president signed into law on June 16 the Ocean Shipping Reform Act of 2022 (OSRA 2022) that attempts to rein in the attendant charges for those delays (amidst numerous other provisions), and the Federal Maritime Commission’s (FMC’s) chief administrative law judge (ALJ) has issued a decision construing the FMC’s interpretative ruling about the enforceability of delay-related charges.
The enormous demand for goods during the pandemic significantly disrupted the east-west flow of containers, creating enormous backlogs in the movement of container ships and containers in U.S. ports. Meanwhile, more and more shippers are coming forward with complaints about what they view as staggering container demurrage and detention charges. The road ahead promises to be bumpy as ocean carriers, shippers and government regulators formulate the standards that will govern the assessment and enforcement of these charges to smooth the way ahead for the return to shipping normalcy.
By way of a brief recap, ocean carriers charge shippers demurrage for delays in retrieving containers at a marine terminal that exceed the allotted free time under the container carriage agreement between the parties, as well as detention for delays that exceed allotted free time in returning containers to the terminal when they are loaded or offloaded outside the terminal. In the spring of 2020 as container ships formed offshore parking lots at U.S. ports, the FMC issued an interpretative ruling providing that the purpose of demurrage and detention charges is to facilitate the fluidity of container movement and incentivize shippers to keep containers moving in commerce. Where charges are assessed for delays beyond the control of shippers, such charges will be closely scrutinized and may not be enforceable.
In the first case of its kind, on April 22, 2022, the FMC’s ALJ issued a 35-page decision addressing detention delay charges assessed against 11 containers by ocean carrier Hapag Lloyd. There, the judge considered whether appointments were unavailable for equipment return during the allocated free time, and if so whether the carrier was liable for civil penalties. The judge delved into a fact-intensive inquiry, including more than 13 pages of findings of fact, and ultimately held that the detention charges were unreasonable because sufficient appointments were not available to return the containers on 14 of 19 days after free time ended.
In 2021, the FMC adjusted the maximum civil penalty amount for inflation to $12,363 for a violation of 46 USC § 41107(a), and $61,820 if willfully and knowingly committed. The FMC’s regulations require that it consider various factors in deciding the civil penalty amount, including the nature, circumstances, extent, gravity of the violation, degree of culpability, history of prior offenses, ability to pay, and such other matters as justice may require.
In this case, the ALJ ordered the carrier to pay a civil penalty of $58,730 per violation for 14 violations amounting to $822,220, and issued a cease and desist order against Hapag Lloyd to stop it from imposing demurrage or detention charges when insufficient appointments to return containers are available. Curiously, Hapag Lloyd and the FMC’s Bureau of Enforcement eventually reached a settlement of these claims for $2 million.
To recover container demurrage and detention charges, OSRA 2022 now requires ocean carriers to issue invoices that delineate numerous facts supporting the charges, and include two representations that the charges are consistent with any FMC rules addressing demurrage and detention and the carrier’s performance did not cause or contribute to the underlying charges. The failure to include the require information negates the shipper’s obligation to pay and exposes the carrier to civil penalties under 46 USC § 41107(a) as discussed above.
On June 24, the FMC’s general counsel issued a notice advising that certain provisions of OSRA 2022 took immediate effect, including prohibiting carriers from assessing any party for a charge that does not comply with applicable statutes and regulations, and issuing demurrage and detention charges unless they comply with the requirements discussed above. However, the FMC did not provide any guidance regarding the practical implementation of these requirements, though it does not appear that the FMC is taking any unilateral enforcement steps at this time to penalize carriers for non-compliance. Compliance enforcement likely will entail FMC actions initiated by shippers.
Keep in mind that the new invoice billing measures are only the first phase of OSRA 2022. The act tasks the FMC to create a new “charge complaint” process to expedite the adjudication of disputed charges, and develop further rules addressing detention and demurrage charges and service contract terms, as well as best practices related to intermodal equipment.
The FMC faces a challenging year ahead as it works to build out the new regulatory landscape Congress outlined in OSRA. Yet based upon the Hapag Lloyd decision, which only addressed 11 containers, it seems evident that pre-OSRA 2022 demurrage and detention disputes, if not post-Act disputes, will prove labor intensive as parties delve into the underlying facts and causes of delay. With millions of containers in service, resolving these issues could prove a daunting task.
Even as OSRA 2022 attempts to right the maritime-supply-chain ship, many of the congestion issues giving rise to the current regulatory upheaval may abate—not due to Congressional action, but rather because of the cyclical nature of container shipping. As higher inflation and interest rates, and the replenishment of pandemic-depleted inventories lead to a softening of U.S. import demand, market conditions in the second half of 2022 likely will ballast down delays by reducing the flow of westbound container traffic. We will soon see whether the pandemic’s impact on container shipping starts to loosen its grip.
“Brewing Container Delay Disputes: When Will the Pandemic’s Impact on Shipping Loosen Its Grip?” by Keith B. Letourneau was published in the Texas Lawyer on August 8, 2022.
Reprinted with permission from the August 8, 2022, edition of Texas Lawyer © 2022 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.