While the tide turned sharply with enactment of the Ocean Shipping Reform Act of 1998 (“OSRA,” effective May 1, 1999), we knew all along that the controversial and long-awaited deregulation of international water carriage wasn’t the last word in government oversight of our industry. There are just too many issues, many of which are driven by changing global socio-political and economic trends. In May 1999, this column looked ahead, opining that “while the victor of this duel between contract and tariff is pre-decided by a legislatively-blessed marriage of economics and law, what we’re seeing here is really only the latest stage in an ongoing continuum.”
Thus, it shouldn’t be much of a surprise that practices ocean carriers have adopted to maximize economic efficiency in their service contracts has prompted the Federal Maritime Commission to reexamine some of its rules. Most recently, carriers’ incorporation of international freight rate indices into their service contracts to allow periodic modification of rates during contract terms (typically a year) has caught FMC’s eye. Those varying rates are applied over the course of the service contract’s term, not subject to public scrutiny due to OSRA’s confidentiality provisions.
There are a number of such indices, such as the China Containerized Freight Index and the Transpacific Stabilization Agreement Index. Their administrators gather data from constituent carrier members about spot rates they are charging for various routes and services at stated intervals. The indices fluctuate based on market conditions, fuel and other surcharge costs, and other factors within the ocean shipping industry, and produce data that translates into adjusted freight rates in service contracts.
FMC regs found 46 CFR 530.8(c)(2) create a potential problem for this practice, providing:
(c) Certainty of terms. The terms [of service contracts] described in paragraph (b) of this section may not:
(2) Make reference to terms not explicitly contained in the service contract itself unless those terms are contained in a publication widely available to the public and well known within the industry.
Most freight rate indices aren’t published, at least not widely to the public (and when they are, it’s usually for a charge), producing at least a technical violation of this reg. OSRA, from whence 46 CFR 530 sprang, was designed to grant parties to ocean shipping contracts latitude to take advantage of free market conditions in defining the terms of their relationships, while simultaneously freeing Uncle Sam from the costly, obsolete and, some would say, impossible task of strict regulation of international water carriage. But while OSRA allows carriers to sell their services at terms tailored to individual relationships, it also requires that those terms be certain, express and clearly understandable at the time pen meets a service contract’s paper.
Therein lies the rub. Should FMC’s regs aimed at certainty trump OSRA’s goal of allowing participants to play ball on their own terms in light of the current industry practice of reference to freight rate indices? Does incorporation of variable rates really create a significant risk of dispute between the consumers and providers of ocean transportation services? OSRA requires ocean carriers to file with FMC their service contracts (which must include a written statement of freight rates), but is the goal of that requirement undermined by the unavailability of rate data at the time of filing, when FMC can always look them up itself? FMC asks these questions just after President Obama issued a directive that all federal agencies review their regs to allow the public more flexibility when consistent with statutory designs.
On October 13, 2011, FMC published a Notice of Proposed Rulemaking on the subject, eliciting public comment about relaxation of 46 CFR 530.8(c)(2), which would change the reg to state: “(2) Make reference to terms not explicitly in the service contract itself unless those terms are readily available to the parties and the Commission.” The amendment would also be made to 46 CFR 531.6 which addresses NVOCC Service Arrangements. Comments or suggestions to FMC are due by November 28, 2011 (see the link below for instructions).
Ocean transportation relationships, like most others in international business, are evolving. Developing technologies, the current economic climate, socio-political factors, and other circumstances are producing new environments. It was precisely these circumstances that prompted OSRA and deregulation of numerous other industries. If industry participants prefer to operate based on freight rate indices, and their doing so creates no significant risk of dispute or inequity, then it should be legal.
Ref: Notice of “Proposed Rule for Service Contracts that Link Rates to Freight Indices,” available on the FMC’s website at http://www.fmc.gov/assets/1/Documents/11-17-Notice%20of%20Proposed%20Rulemaking.pdf; and May 1999 Legal Lookout article “Ocean Shipping Reform takes effect May 1, 1999: On your mark! Get Set! READY?!? continue with slow, gradual, evolutionary process….”; available on ForwarderLaw at http://www.forwarderlaw.com/library/view.php?article_id=699.
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