Pricing Demurrage and Detention

For now, the FMC seems to feel that demurrage and detention charges tend to create unfair costs or burdens on consignors and consignees. Technically, demurrage refers to the cost borne by a port when an import container has been delivered off the dock by the ocean carrier and it languishes in the terminal yard. This terminal space is valuable and when the port is tied up providing extra security or dealing with the congestion of getting into and out of the terminal yard these costs are not insignificant, especially at the major ports like L.A. and Long Beach. The ocean carrier, being a legal party to the ocean bill of lading, is expected by the port to collect the demurrage charges from the consignor. 

Detention, on the other hand, refers to the cost borne by the ocean carrier when the consignee, having duly received the import container and its contents, holds onto the empty container beyond the allotted number of days before returning it to the vessel at port. The ocean carrier (which owns the container) would assess to the consignee a detention charge for the cost of not having its property returned so that it could either load it with export freight or empty backhaul it to where the next consignor has a shipment awaiting. 

So, the issue is not that a consignor or consignee has caused financial harm to an ocean carrier and/or a port; it is how to assess an appropriate charge for it. Obviously, the carrier needs to be able to show that the consignor or consignee was negligent in respecting allotted times. A force majeure (e.g., severe weather) ought to relieve either of them from an accusation of negligence. Also, allotted times need to be agreed to and spelled out in the ocean bill of lading, which is the legal contract of carriage signed by the consignor and the carrier. 

On the other hand, the consignor ought to insist on language in the bill that absolves him if, say, heavy traffic congestion prevents timely delivery or pickup. The consignee (as the importer) may need to ask for similar representation from the consignor (who is, in effect, the seller/exporter of the freight). The tricky bit here is that the consignee is not a party to the bill of lading. So carriers have an incentive to work with their consignors to, likewise, work with their consignees to keep the market as efficient as possible. As an aside, if the importer bought the goods from abroad and arranged for transportation as well, then he becomes both the consignor and consignee.

The optimal charge is an amount to make the carrier and/or the port whole. Demurrage should cover the port’s cost of dealing with a languishing container plus some punitive fee (agreed to, of course, and written into the bill of lading). Detention should cover the carrier’s cost of not having its container when expected (which includes the opportunity cost of a revenue load foregone or the inconvenience of having to find another one when the container is finally returned). 

The FMC’s “interpretive rule” seeking to promote standardized language on demurrage and detention is fine. In a related area, Incoterms, as a form of standardized commercial language, has served the transportation industry well. Of course, the parties ought to be able to use whatever language they wish in their bill of lading. But if the FMC uses “interpretive rules” to get into the business of suggesting appropriate allotted times, types of evidence constituting overcharging and how to settle disputes, it will find itself in an extra-legal quagmire. Let the parties figure it out on a contract-by-contract basis and let them take it to the courts if the dispute cannot be resolved.

There is no denying this process is complicated. Other actors playing roles in these disputes include the trucks or rail carriers that move the containers into and out of the ports and any non-vessel-operating common carriers (NVOCCs,) which might be an intermediary between the ocean carrier and the U.S. importer. But if we keep our eyes on efficiency — that is, keeping the containers moving safely and securely — as opposed to fairness, all parties may find it easier to work together (i.e., to negotiate and write better contracts) as opposed to independently lobbying the FMC to choose sides.