Pauline Davies, Fee Langstone, New Zealand
With demurrage and detention have become particularly hot topics since COVID. This paper discusses some international developments in the area, some ideas for reform and also some steps that freight forwarders can take to protect themselves against clients who don’t want to pay for these costs.
There are some differences in the way the terms “demurrage” and “detention” are used in different jurisdictions, and some of the case law doesn’t draw the distinction at all. The focus of this paper is on the charges levied by the shipping lines for the delayed return of containers – detention – but the principles are equally applicable to demurrage.
There are two key issues that need to be kept in mind in any discussion on detention. The original purpose of container detention charges was as late fees, to incentivise traders to return containers promptly, so that they could be provided by carriers to other customers. The lines have a direct financial interest in having cargo on the move and a shortage of equipment can have a measurable impact. This is obviously fair and reasonable in principle.
The first issue which has been brought into very clear focus by COVID and the resulting supply chain disruptions, is that the principle is often applied in practice in a way that seems much less fair and reasonable. The lines impose detention charges even when the delay in picking up or returning a container is not the fault or within the control of the party with the responsibility for taking those steps. Examples from around the world include delays caused by port labour shortages, port congestion, port closures due to weather conditions, lack of communication from carriers about schedule changes and delays, re-routing of containers to unintended discharge ports and delays by carriers in making bills of lading available. Then there are matters within the control of the ocean carriers themselves, including lack of space at their depots preventing containers from being returned. From a New Zealand perspective, there have been fewer ships arriving, which means that containers accumulate at transshipment ports such as Singapore. Larger importers then receive a lot of cargo at once instead of it being spaced out, and run into problems with lack of warehouse capacity.
The second issue is that, over time, detention charges have morphed from an incentive into more of a pure revenue stream, with the per diem charges increasing and the amount of free time being reduced.
USA – Federal Maritime Commission
The country that has so far been the most proactive in dealing with these issues is the USA. Its Shipping Act 1984 has always had a provision requiring all carrier charges to be just and reasonable. But in 2018 the Federal Maritime Commission, which is responsible for compliance with the Act, responded to a petition from a federation of trade associations representing cargo interests by opening an inquiry into the manner in which demurrage and detention charges were being levied. The FMC carried out an investigation and issued an interim report on 4 September 2018. The report noted that the surveyed ocean carriers’ income from demurrage and detention had increased 90% in 2014 (from 2013), followed by an additional year-on-year increase of 86% in 2015. A later decrease followed by another rise meant that by the end of 2017 total demurrage and detention income was back to more or less the 2015 peak, an increase of 30% over the total for 2016.
At the same time, the FMC observed considerable variation between individual carriers, but with one having increased its annual demurrage and detention income by 77% between 2014 and 2016, resulting in this being 34% of its total revenue for the year.
On 28 April 2020 the FMC issued an Interpretive Rule to give guidance as to some of the factors that it would now be taking into account, in assessing whether a demurrage or detention practice should be treated as unjust or unreasonable and would therefore breach carrier obligations as to reasonableness imposed by the Shipping Act.
The FMC took as its starting point, that the primary purpose of detention and demurrage charges is to create a financial incentive to promote freight fluidity. So, any charge that is not imposed to serve that primary purpose will not be considered reasonable. Then there are factors that will be taken into account in deciding whether or not the primary purpose is being served:
- The extent to which charges for detention are linked to free time for container availability. The shorter the time, the less likely it is that the charge will be considered reasonable.
- Charges that do not relate to the primary purpose, such as charges imposed when empty containers are unable to be returned, will likely be found to be unreasonable.
- An important issue will be whether and how cargo interests are advised that cargo is ready for retrieval.
- The FMC may also take into account the existence, accessibility, content and clarity of carrier policies around detention and demurrage, including dispute resolution practices and the manner in which charges are invoiced.
- Transparency is important. The FMC will consider whether terminology used by carriers is clearly defined, whether the definitions are accessible and the extent to which the definitions might differ from how the terms are used in other contexts. Any person who may be vulnerable to these charges is entitled to know in advance what the charges will be and how they will be levied and must be able to easily find clear and unambiguous information.
Quite a lot has happened since the issue of the Interpretive Rule.
In June this year President Biden signed into law the Ocean Shipping Reform Act, which in relation to demurrage and detention did three key things. First, it directed the FMC to self-initiate investigations of international ocean carrier business practices and apply enforcement measures ie without waiting for a complaint. The FMC promptly set up an enforcement unit which has been up and running since about the end of July. Second, it shifted the burden of proof of reasonableness from cargo interests to ocean carriers. So, cargo interests do not have to show that charges are unreasonable – carriers must show that they are reasonable.
And third, the Act now requires specific information to be provided on invoices. There was no phase-in period, this took immediate effect and the FMC said that it would be taking action against any carrier in breach. Very soon after that it reached settlements with Wan Hai Line and Hapag-Lloyd for them to pay significant civil penalties for violations in relation to their demurrage and detention practices.
The Interpretive Rule, which is still in place despite the law change, has also been used to help at least one forwarder. In February 2022 Expeditors Inc had to shut down most of its global computer systems because of a cyber-attack. This meant that container management was not happening as it normally would, exposing Expeditors’ clients to demurrage and detention charges from the lines. The FMC used the Interpretive Rule to say that because of the circumstances it would be unreasonable for the lines to just ignore what had happened and charge as usual, and they were asked to exercise restraint.
So, it seems that what is happening in the US is at least starting to have an impact.
The US approach has not so far been replicated elsewhere, that I can find, but the general themes of keeping freight moving and behaving reasonably and with transparency are quite independently finding their way into the case law of other countries.
For example, in 2020 the Ontario Court of Appeal ruled on a case where a railway company attempted to claim detention from a party with whom it had no contractual relationship. This case involved railway cars rather than containers but the principles were the same.
Amongst other findings, the court held that there is no common law basis for charging demurrage to a non-contracting party. The fact that the railway company issued a tariff which included these charges was not, of itself, sufficient basis for a claim, and the court said that the tariff would only be binding on parties with whom the railway company had a contract.
One of the railway company’s arguments was that the detention of its property beyond the end of the free time amounted to unjust enrichment. In other words, the continued possession of the containers conferred a benefit on the defendant to the corresponding detriment of the railway company. This argument failed because there was no evidence that the defendant had derived any benefit at all from the detention of the railway company’s property and nor did the evidence establish that the railway company had suffered any detriment – such as that it had been able to move other cargo because of a shortage of equipment. Essentially, it was a pure penalty.
Another example is MSC Mediterranean Shipping Company SA v Cottonex Anstalt a 2015 decision of the English High Court, which is currently the leading UK case in this area and which would be given the most consideration in New Zealand.
The case concerned 35 containers of raw cotton shipped from the Middle East to Bangladesh, which all arrived at various dates in mid-2011. The Bangladeshi purchaser paid the purchase price to the shipper but then did not collect the cargo from the port.
In June 2013 the carrier brought proceedings against the original shipper for demurrage, based on provisions in its bill of lading which, on the face of it, entitled it to a recovery. A strict application of the bill of lading provisions would have led to the shipper being liable for over US $1m plus interest, despite the replacement value of each of the containers being no more than US $3262.00 ie a maximum of US $114,170 for all 35.
The court agreed with the carrier that the shipper was liable for demurrage under the extended definition of “Merchant” in the bill of lading, and also agreed that demurrage had started to run at the end of the free period, being 14 days after the discharge of the containers from their respective carrying vessels. However, the bill of lading provisions said nothing about when the demurrage obligation would cease, meaning that if read literally, the obligation to pay would be completely open-ended.
The court wasn’t prepared to accept that. It said that the correct interpretation was that demurrage would continue until the containers were either redelivered to the carrier, or the carrier exercised its contractual right to unpack the containers itself due to the consignee’s default, or the contract was terminated.
On the evidence, the court said that the contracts of carriage had been repudiated by the shipper by the end of September 2011, repudiation essentially meaning that the shipper was not intending to complete performance. Bangladeshi Customs rules made it impossible for the containers to be retrieved, and the delay in collection was in any event so long that it frustrated the commercial purpose of the contracts.
When a party repudiates its obligations under a contract, the other party has the choice of either cancelling the contract and claiming damages for breach, or affirming the contract and insisting that the other party continue to perform. The carrier here did not cancel, and the court therefore considered whether there was any legitimate basis for it keeping the contracts in force and claiming the ongoing demurrage.
It said that because the purpose of demurrage is to quantify the loss suffered by the carrier as a result of containers not being returned, it was not legitimate for the carrier to keep the contracts in force for the sole purpose of claiming demurrage if, in fact, no loss was being suffered. As there was no evidence of any loss being suffered as at the end of September 2011, the carrier’s conduct was unreasonable.
Even if the carrier had been entitled to keep the contracts in force, the court considered that the demurrage provision in the bills of lading would have been unenforceable as a penalty. To explain: if a party will genuinely suffer a loss because of breach of contract by someone else, it is completely legitimate to make a pre-estimate of what that loss will be and agree with the other party that this is what will be payable.
But, if the charge is significantly elevated above the likely loss, it will be treated as a penalty, which is unenforceable. In Cottonex, the court said the fact the demurrage did not have an end point and was going to exceed the cost of replacing the containers, meant that it was a penalty. The court accordingly held that the carrier was entitled to demurrage until the end of September 2011 but not for any further period.
Outside the common law context, the Antwerp Court of Appeal in 2019 (applying French law) used reasoning similar to that in Cottonex in concluding that a carrier was not able to continue claiming demurrage after becoming aware that its containers would not be returned, such being considered an unreasonable approach.
Then, in 2021 but this time applying English law, a Belgian court at first instance directly applied Cottonex in saying that because the consignee had told the carrier that he would not be taking possession of the goods, the contract had been frustrated from that date of that communication. Demurrage was not payable thereafter.
Less than a month later the Belgian Court of Appeal considered a case where cargo had been seized by Customs authorities at the discharge port because the consignee had not collected it. The carrier didn’t tell any of the other interested parties that this had occurred but merely sued for demurrage. Those other parties did not find out about the seizure until the proceeding was under way.
It was held that the carrier’s behaviour was unreasonable and excessive. The court also said that because the demurrage tariff was not set out in full in the carrier’s terms and conditions but only referred to the carrier’s website, there was no proof that the parties had agreed to the amount claimed. Belgian law does not treat a reference to a website as sufficient, and in any event it was not possible to verify what tariff information on the website as at the date of the contract.
All of the cases discussed, and the FMC Interpretive Rule, share clear commonalities despite coming from different legal systems and perspectives and having variations in the approach taken to the exercise. The overwhelming theme is that carriers must behave reasonably, they must properly communicate and there must be clarity over what exactly was agreed between the parties. A primary reason the carrier lost in the Canadian case is that there was no evidence that the party it sued had agreed to anything at all.
Having said that, not all jurisdictions have (so far) approached the issue in the same way and hence the outcome to any particular demurrage claim in the future may well depend both on the jurisdiction in which the claim is brought, the factual scenario and the reaction that the common law courts, at least, take to the principles outlined in Cottonex.
In Australia, for example, the courts have said that container demurrage charges are simply ordinary contractual charges for the hire and use of containers, which apply once the free period has expired. So, no different to late charges for, say, late returning a library book.
New Zealand has yet to see a substantive case on the point. There has only been one case on detention, where it was argued that the charges were a penalty, but the evidence was insufficient and the court declined to rule on it. We have no way of knowing what a court might do if presented with a fully argued claim.
Law Reform / Contracts
The question to ask in New Zealand is whether it is time for legislative action similar to that taken in the US, because it really seems to be a free-for-all here where the carriers hold all the cards and where some conduct is unreasonable in the extreme, including recent instances where a carrier’s depot was full and yet it was still charging for containers that couldn’t be redelivered.
In Australia, the Freight and Trade Alliance and the Australian Peak Shippers Association earlier this year made submissions to the Productivity Commission about perceived unfair charging and advocated for legislative change to protect cargo interests and forwarders. The Productivity Commission’s draft report was published on 9 September 2022. It suggested that shipping contracts should be made subject to the Australian laws around unfair contract terms (they are presently exempt under the Australian Consumer Law) and cited the US approach on reasonableness as an example of what can be done. It will be interesting to see what Australia does with this. If the move proceeds, it will apply to contracts with consumers only, being for these purposes not just individuals but also to contracts involving businesses with fewer than 20 employees and where the upfront contract price is no more than $300,000 or $1m if the contract is for more than 12 months.
New Zealand has very similar unfair contract terms rules, found in the Fair Trading Act but with a lower financial threshold and no limits on business size. Also shipping companies are not exempt, which means that this is already an avenue for smaller shippers or importers to explore if they consider the charges being imposed are unfair. But this has its limitations. It is only the Commerce Commission that can take action and it must file court proceedings and ask the courts to rule. The requirements are strict, in that they require the court to be satisfied that the allegedly unfair term creates an imbalance between parties’ rights and obligations, that the term is not necessary to protect the party seeking to impose it and that it would cause detriment to the other. All three must be shown so, for example, demonstrating an imbalance is not enough if it does not also cause detriment.
The question then is whether this is enough or whether a shipping-specific regulator along the US model is something to be considering.
In terms of what forwarders can do here, in the absence of legislation:
- Know your client. Do your due diligence…properly and thoroughly!
- Make sure terms and conditions are up to date and fit for purpose, and make sure there is a proper process in place for making them binding on the customer. Look particularly at force majeure clauses, and clauses that allow termination if there are concerns over the customer’s solvency.
- Check credit terms and see if the credit period given to each customer is appropriate for that customer.
- Include lien and PPSA clauses, and consider taking personal guarantees from company directors.
- Spell out demurrage and detention rules to customers to make sure they are not taken by surprise! Do it early, regularly and every time they change.
None of this will save a forwarder from an insolvent client but it will certainly provide a solid basis for chasing one that is just refusing to pay.