Ending a process that started back in 2004, the Federal Maritime Commission (“FMC”) voted unanimously on June 6, 2018 to exempt Non-Vessel Operating Common Carriers (“NVOCCs”) from certain filing requirements related to their service contracts (“NSAs”) and rate agreements (“NRAs”). This vote culminated in the publication of new regulations addressing the same which will take effect at the end of next month.
History is a Relentless Master
By way of background, NVOCCs were required to file their NSAs and any amendments to those agreements with the FMC. NVOCCs were also required to publish the essential terms of the service agreements in their rules tariffs. The NRAs were limited in how they could be used as they could not be amended, even when NVOCCs were faced with changing trade lane conditions, and could only include actual freight rates; no other economic terms were permitted. These rules impaired a NVOCCs ability to adapt to the ever-changing landscape of the ocean shipping marketplace and impeded the sustainability of the NVOCC business model.
Crying Out for Change
After numerous petitions to the FMC in an effort to free NVOCCs from these burdensome regulations (some of which requested the elimination of 46 CFR part 531 altogether), and in response to comments submitted responsive to the FMC’s proposed regulatory amendments, the FMC decided to publish a Final Rule amending 46 CFR Parts 531 and 532, “Amendments to Regulations Governing NVOCC Negotiated Rate Arrangements and NVOCC Service Arrangements” (Docket No. 17-10) in the Federal Registrar, Volume 83, No. 141.
The Final Rule, effective on August 22, 2018, is intended to enhance efficiency and reduce costs in the competitive NVOCC industry, while still allowing NVOCCs to continue their existing operations, whether under negotiated service contract models or on a rate quotation basis (without engaging in formal contract negotiation processes). Once the regulations become effective, they will make a handful of significant changes.
Taking a Different Tack
First, the prohibition against amending NRAs will be lifted. As a result, NVOCCs and their customers will be able to amend their agreements, if mutually agreed upon by all contracting parties, to be responsive to changes in the ocean shipping arena. The NRAs themselves will have the ability to be longer term between NVOCC and customers, without serious loss of revenue, since they will have the benefit of amending during the course of their agreement rather than terminating an agreement early and entering into a new one or issuing single day or week NRAs. This will likely result in direct cost savings for NVOCCs and their customers, along with more consistency in pricing arrangements.
Second, non-rate economic terms will now be allowed in the NRAs. This will allow NVOCCs to agree with customers on a broad range of terms in NRAs that are akin to NSAs and to ocean service agreements with ocean carriers instead of only rates. NVOCCs and shippers value flexibility in being able to negotiate minimum volumes, volume rates, rate or service amendments and their processes, liability, liquidated damages, credit terms, service guarantees or benchmarks, surcharges, GRIs or other pass through charges from carriers or ports, free time, demurrage, per diem, EDI services, and dispute resolution which were not to previously allowed to be included in an NRA. Allowing NVOCCs the freedom to contract in this manner in NRAs should result in greater market efficiencies.
Third, shippers will now have the ability to accept the terms of an NRA by booking a shipment after receiving the NRA terms from the NVOCC, if the NVOCC incorporates a prominent written notice that booking constitutes acceptance of the NRA terms in the NRA or an amendment, rather than the burdensome process of filing the NRA with the FMC. This change makes it clear that the tender of cargo in response to an NRA will satisfy acceptance and formation of a contract.
Fourth, NSA’s may now be exempted from both filing and the publication of essential terms requirements. These amendments should ensure that NSAs continue to be an option for shippers and NVOCCs but with a reduced regulatory burden. NVOCCs will still have to retain NSAs, amendments and associated records for five years from the termination of the NSA and provide them within 30 days upon request by the FMC. The removal of the filing requirement was reported to reduce NVOCCs’ burden by 162 hours and enable a savings of approximately $10,728.37. Of course, those who prefer NSAs will still be able to enjoy the extra formality and other benefits of NSAs.
Lastly, under the Final Rule, if an NRA rate is not an “all-in rate”, then the NRA has to specify which surcharges or assessorial charges will apply by including the specific charges in the rules tariff. Applicable charges in the rules tariff are to be fixed once the first shipment has been received by the NVOCC until the last shipment is delivered, subject to a shipper’s and NVOCC’s further amendment by mutual agreement. As to pass-through charges and ocean carrier GRIs for which the NRA or rules tariff does not provide a specified amount, the NVOCC can invoice the shipper only for charges actually incurred by the NVOCC (a markup is not allowed). The removal of the prohibition on pass-through ocean carrier GRIs should increase efficiency and flexibility within the NRA framework.
Freedom to Regulate Their Own Pursuits of Industry
The significance of these changes cannot be understated. NVOCCs now may engage their customers more freely from regulation. For many years, NVOCCs have been unable to compete on an equal playing ground with exempted ocean carriers. Now, NVOCCs and their customers will be able to negotiate easily rates and services better serving the interests of both NVOCCs and shippers. As Commissioner Rebecca Dye aptly stated: “The Final Rule will provide [the] industry with the flexibility and freedom to fully meet the business needs of their customers, not the government—as should be the case.”
