United States: FMC Issues Final Rules For NVOCC Service And Rate Agreements

Michael Cavanaugh and Eric Lee are Partners and Daniel Burkard is an Associate in the Washington D.C. office

HIGHLIGHTS:

  • The Federal Maritime Commission (FMC) issued Final Rules pertaining to Non-Vessel Operating Common Carrier (NVOCC) Service Agreements (NSAs) and Negotiated Rate Agreements (NRAs) that will become effective Aug. 22, 2018.
  • The Final Rule on NVOCC Service Agreements eliminates the requirements that NVOCCs file NSAs with the FMC and publish essential terms of each NSA in tariff format; but it adds requirements that NVOCCs provide free access to its tariffs to the public and include in their tariffs a notice that they will conduct business utilizing NSAs.
  • The Final Rule on NRAs enables NVOCCs to amend NRAs at any time, permits NVOCCS to include non-rate economic terms in an NRA, and allows pass through of vessel operators' General Rate Increases (GRIs) and pass-through rates and charges, if and when incurred. The FMC also will allow NRAs to become effective upon the shipper's booking of cargo with the NVOCC.

The Federal Maritime Commission (FMC) issued its Final Rule amending its regulations governing Non-Vessel Operating Common Carrier (NVOCC) Service Arrangements (NSAs) and Negotiated Rate Arrangements (NRAs) contained in 46 CFR §§531 and 532 on July 19, 2018. The Final Rule eliminates the requirements that NVOCCs file NSAs with the FMC and publish essential terms of NSAs in their tariffs; however, the FMC is also imposing new obligations on NVOCCs that use NSAs to provide free tariff access to shippers and to publish a tariff notice that the NVOCC uses NSAs. The Final Rule also allows NVOCCs to amend NRAs at any time, include non-rate terms in NRAs and include general rate increases (GRIs) and pass-through rates in NSAs, but only to the same extent the NVOCCs actually incur these charges. The FMC also will allow a shipper's booking of cargo with the NVOCC to constitute acceptance of an NRA. In such circumstances, the NVOCC must include prominent written notice in the NRA stipulating its effectiveness to any bookings with the NVOCC.

The FMC's Final Rule is a response to the petition filed on April 16, 2015, by the National Customs Brokers & Forwarders Association of America (NCBFAA) requesting the FMC eliminate or amend the filing and essential terms requirements for NSAs in 46 CFR §531. The NCBFAA also requested that the FMC expand the existing NRA exemption in 46 CFR §532 to include economic terms beyond rates and to remove the prohibition on amendments to an NRA after initial shipment is received by the carrier. NCBFAA argued that non-rate economic terms in an NRA were necessary to effectuate a properly negotiated agreement. NCBFAA also argued that the publication of NSA essential terms was an overly burdensome requirement that provided little to no regulatory benefit.

The FMC received comments from 16 different sources, including NVOCCs, freight forwarders, trade associations for cargo interests and vessel common carriers. The comments from the ocean transportation intermediaries generally supported the proposed regulatory amendments. After considering the comments, the FMC granted the NCBFAA's petition and agreed to review the regulations specified in the petition. The FMC delayed its review pending the completion of separate rulemaking related to other portions of 46 CFR §531.

On Nov. 29, 2017, the FMC issued a Notice of Proposed Rulemaking, whereby it proposed 1) to remove the NSA filing and essential terms publication requirement, 2) allow non-rate economic terms in NRAs, 3) allow for the inclusion of GRIs and pass-through charges in NRAs, and 4) authorize amendments to NRAs and allow for the acceptance of the NRA's terms through written acceptance or booking (collectively, the Proposed Rulemaking). In response to the Proposed Rulemaking, the FMC received 39 comments from a cross-section of industry stakeholders. All but two comments supported the FMC's Proposed Rulemaking.

The FMC elected to move forward with its Proposed Rulemaking following receipt of the comments. The FMC determined that comments were overwhelmingly favorable regarding elimination of NSA filing requirements. However, the FMC concluded that there was also clear industry support for continued use of NSAs as a contracting method. The FMC also stressed that it would continue to provide oversight for commercial disputes related to NSAs by requiring NVOCCs to retain the NSAs, amendments and associated transaction records for five years.

The FMC decided to allow NRAs to include non-rate economic terms, reasoning that the Proposed Rulemaking should allow regulatory flexibility to NVOCCs and their customers. The FMC further determined that allowing NVOCCs and shippers to negotiate terms different than those set forth in the NVOCC's rules tariff "would likely lead to more competitive and efficient shipping arrangements." The FMC considered the possibility that the inclusion of non-rate economic terms would increase the complexity of NRAs; however, it found that the benefits afforded by including non-rate economic terms outweighed the limited burden of increased complexity.

The FMC also decided to allow NRAs to include GRIs and other pass-through charge provisions. Previously, the FMC only allowed for pass-through charges to be invoiced to shippers and generally prohibited GRIs. In amending its rule, the FMC determined that it would now allow NVOCCs to charge shippers GRIs and pass-through charges, but only at the same rate the NVOCC was charged and without any markup.

Finally, the FMC removed its previous prohibition of amendments to NRAs, and also will allow the act of booking carriage to constitute shipper acceptance of the NRA terms. In adopting these changes, the FMC concluded that it is overly burdensome to compel NVOCCs to create a new NRA every time it wishes to amend the NRA terms. The FMC further reasoned that shipper acceptance through booking carriage was proper because the NVOCC's inclusion of "prominent written notice, with fixed language stating that a booking constitutes acceptance" in the NRA is substantially the same as obtaining written acceptance from the shipper. The FMC expects that written notice will avoid the potential for confusion about the applicable terms.

Takeaways and Considerations

The FMC's rulemaking is indicative of the current administration's efforts to reduce compliance costs without diluting necessary agency oversight. The stated goal of the FMC's rulemaking is to provide greater flexibility to NVOCCs and remove potentially burdensome regulations that most stakeholders view as providing little benefit to any industry stakeholder. This announcement appears to be a positive sign for NVOCCs, which is unsurprising given the positive feedback the FMC received from stakeholders during the commenting period. The FMC's changes to the NRA and NSA requirements will become effective Aug. 22, 2018, and should have an immediate impact on NVOCCs' agreements with their shipper customers. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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