In spite of global supply chain interruptions caused by COVID-19, carriers and terminals have largely continued to impose tariff charges for storage, detention, and demurrage of containers.
While the pandemic may have exacerbated these issues, the problem of being stuck between carriers and customers facing demands for detention and demurrage is a perennial problem for freight forwarders. Delays by inspections often result in charges for which no party wishes to be responsible; abandonment by consignees can leave a forwarder holding the bag; some customers simply refuse to pay charges they do not think are justified or were not expected.
In order to manage these risks, forwarders need to understand the legal framework, take steps to avoid problems before they arise, and act to mitigate problems when they do.
The legal framework
Detention and demurrage charges are commercially necessary in order to keep necessary equipment moving through the supply chain and reduce port congestion by providing a strong incentive for immediate pickup of cargoes.
In reality, these charges also act as penalties, and readers will no doubt be familiar with many cases where imposed demurrage or detention charges wildly exceeded the cost of replacement equipment – or even the value of the cargo itself – and in such cases the charges become obstacles to commercial resolution, rather than incentives.
Carriers obtain the right to impose these charges in two ways: first, from the Bill of Lading, and second, from their Tariff.
The Bill of lading binds the shipper and consignee to the terms, including their liability for carrier charges. Through the “Merchant Clause”, carrier bills almost always purport to bind a wide range of other parties, including forwarding agents and notify parties, in addition to the shipper and consignee. In my view, the extension of liability to the forwarding agent through the contract for carriage is a dubious exception to the principal of privity of contract and the principals of agency, but there is no clear jurisprudence in Canada confirming or denying their effect.
On the other hand, a carrier is generally entitled to offer its services in accordance with its Tariff, and the Tariff – to which the forwarder agrees by placing business through the carrier – will also likely contain provisions assigning liability to the forwarder for the cargo owner’s failure to pay charges. So, forwarders will wind up facing demands for charges where their customers are unwilling or unable to pay.
An emerging framework?
In the last year both FIATA and the (U.S.) Federal Maritime Commission have published interpretations or guidance on detention and demurrage charges that provide some hope that the indiscriminate application of these charges by carriers may begin to be circumscribed.
The FMC noted the proper purpose of these charges – incentives to freight fluidity – to identify factors to be considered in the fair and commercially appropriate imposition of these charges. Accordingly, demurrage should only be charged where cargo is available for retrieval by the consignee, since if it is not available (perhaps due to inspection) the charge cannot provide an incentive. Similarly, if a container is for whatever reason not available for return, then continuing charges serve no incentive purpose.
The FMC’s decisions and interpretations are binding under US law; they are also often persuasive to (though not binding on) carriers and courts in other jurisdictions, particularly those with strong trade links with the USA.
FIATA also issued non-binding guidance based on similar principles which may also assist forwarders in negotiating with carriers. Under the freight fluidity principle, for example, “free time” should include delays outside the Merchant’s control; charges should not accrue during customs inspections; charges should not accrue indefinitely but should be capped; and there should be no charge for vessel delay.
An Ounce of Prevention
Not all these scenarios can be avoided, but forwarders can and should take steps to minimize the chance they will crop up.
Know your customer. The more aware you are of your customer’s business and practices, the more likely you will notice red flags and move to address them before they escalate.
Make sure you have properly incorporated the CIFFA STCs into your contracts and rate quotations, and ensure that every customer signs off on their application. They have been crafted to help protect your right to recover these charges.
Keep an eye on receivables. Inability to pay freight is a common reason for cargo to be detained, resulting in more charges against an insolvent merchant someone will have to pay.
Review your return policies. In my experience forwarders have no problem identifying when cargo arrives or making prompt arrangements if there are no obstacles. Fewer have practices to ensure follow up on prompt return of empty containers in situations where it is picked up by customer or dropped at the customer’s location for destuffing.
For negotiable bills of lading, keep your eye on the underlying transaction and take steps to ensure the consignee has paid for and obtained properly endorsed OBLs and is willing and able to take delivery before taking control of (or clearing, in the case of brokerage) cargo.
Some drops of cure
Absent a sea-change in carrier practices arising out of the FMC and FIATA documents, forwarders will continue to be caught in the middle between carriers and customers in respect of these charges.
Act quickly. If you wait until charges are sixty days past due, the problem will likely be insoluble: charges will exceed cargo value, unwilling parties will abscond or go insolvent, and you or your insurers will wind up in litigation.
Get legal advice. Every situation is unique, and you need expert advice on your particular fact pattern and circumstances before making key decisions – or key mistakes.
Negotiate with the shipper. Where the consignee has abandoned, the shipper not only retains a legal interest in the goods but may have a direct commercial interest in resolving the matter and (e.g.) re-selling the goods to an alternative buyer.
Negotiate with the carrier. While in Canada they are not bound by either FMC or FIATA guidance, these documents agree on principled use of these charges and may help persuade carriers to reduce them in accordance with those principles. Detention and demurrage charges largely represent unearned windfall income (with no corresponding cost of goods or services provided) and the carrier should be willing to negotiate them.
Remove the goods. The CIFFA STCs entitle you to take control of the goods, de-stuff them, store them, and ultimately sell them pursuant to your right of lien. While you will face some charges in destuffing them, and off-port storage still costs money, in many cases this is a much smaller exposure than waiting while the goods accumulate $400-$500 per container per day in dead weight.
You cannot change the wind, but you can adjust your sails.