All importers and exporters which ship through West Coast ocean ports are by now truly concerned about their cargo being on the shelves in time for sale during the holiday season, and on the export side that their cargo might not reach their buyers any time soon. To add insult to injury, most, if not all ocean carriers have announced congestion surcharges to go into effect on the West Coast November 17, 2014. These surcharges are in the following ranges for imports:

As if this was not enough, many of the ocean carriers are passing on demurrage costs to importers and exporters (yes, there are applicable demurrage charges for export containers that are not timely loaded on a vessel) because containers cannot be delivered or shipped for a laundry list of reasons (the perfect storm). These demurrage costs in some cases accumulate to tens of thousands of dollars. Obviously this can pale next to the fact that the importer may pay the demurrage and still not get his cargo delivered in time for holiday sales. Depending on whom you ask the following are the reasons being given for this malaise:

• The Pacific Maritime Association (“PMA”), which represents over 70 multinational ocean carriers and maritime companies in contract negotiations, has accused the International Longshore and Warehouse Union (“ILWU”) of deliberately slowing down traffic at the terminals;
• Chassis shortage and dislocation;
• Rail service delays, including a shortage of rail cars nationwide;
• The exodus of truck drivers who cannot make a living wage;
• Long truck turn times;
• Record retail import volumes (increases of 5.3 percent over 2013);
• Larger vessels discharging massive amounts of cargo;
• Container terminals pushed to storage capacities; and
• The peak shipping season (i.e., the August through October pre-holiday surge).

The ILWU has been in contract negotiations since May with the PMA, which represents terminal operators and shipping lines at 29 West Coast ports from San Diego to Bellingham. Their previous six-year agreement expired July 1.

At the top of the list for exacerbating the problem is that in a recent shift of their business model the ocean carriers sold their chassis to equipment-leasing companies. This created an environment in which chassis that are controlled by one pool operator are not being shared with other pool operators. This results in split-moves. This is where a trucker must drop or pick-up a container at one terminal and the chassis at another adding cost and time to these otherwise routine transactions where they were previously accomplished at the same terminal. It has also resulted in chassis hoarding by some terminals to ensure they have enough equipment for subsequent vessel calls. The ILWU sees this as one of the main reasons for the current congestion problems.

Short Term Remedies:

1. Mario Cordero, Chairman of the U.S. Federal Maritime Commission, has stated that notwithstanding announcements and written notices given by ocean carriers over the past two days that they will begin implementing congestion surcharges by Monday (November 17), he   questions their ability to start imposing the charges immediately on in-transit cargo. In other words, the surcharges are only applicable to cargo which is not yet laden on vessels on November 17, 2014, in route to the U.S. Relief can be sought by importers either informally or through formal proceeding at the Federal Maritime Commission to ensure that this principle is observed by the ocean carriers. Charges which are legally applicable are those in effect at the time the cargo was received by the ocean carrier or its agent for transport.
2. Ocean carriers are failing to deliver cargo on “door” delivery obligations. They have quoted transport terms in service contracts to deliver cargo to the importer’s door, but cannot deliver because their preferred motor carriers are not ready or are unable to obtain chassis or have determined that the money agreement entered into with the ocean carriers no longer makes sense. These ocean carriers are now offering delivery with other motor carries and are demanding as much as $400 per move in additional fees for delivery. But they will not even go this route unless all demurrage has been paid by the importer. Some carriers have tariff provisions which provide that this risk is to be allocated to the shipper. It is our opinion that  unless such a provision is included in the service contract terms, that tariff rules cannot override the basic obligation of an ocean carrier to deliver cargo to its customer at agreed-upon terms. It is our opinion that such a practice would be considered a violation of §10 (d) (1) of the Shipping Act of 1998, as amended, as an “unreasonable practice” in connection with the delivery of cargo.
3. Check your service contracts carefully to determine whether the imposition of congestion surcharges have been specifically excluded. Many service contracts do contain that exclusion. Again, it is our opinion that tariff provisions to the contrary would not be controlling over the service contract exclusion.

Other Remedies.

1. At this time various shippers, and shipper groups, in view of the urgent requirement to move cargo off the docks to store shelves, are seeking political remedies at the White House and Congress in bringing the PMA and the ILWU to settle their differences to ease the congestion on the West Coast. It remains to be seen whether a union contract will ease the congestion issues or whether the paradigm shift with the chassis situation has created a more complicated operations dilemma as the ILWU alleges.
2. Negotiate intermodal through-transport “to door” service contracts to allocate the delivery function and risk to the ocean carrier.
3. Service contract terms should be negotiated and carefully drafted so that congestion surcharges are specifically excluded and not to be overridden by tariff provisions.

Conclusion. The events which have given rise to this extremely troubling circumstance might not have a facile solution. In other words, the resolution of the labor issues between the PMA and the ILWU would still leave intact the operational inefficiencies with respect to third party control of chassis—i.e., non-ocean carrier control. While the preferred structure of ocean transport in this environment would still be door delivery terms, it will remain an open question as to whether ocean carriers will be capable of meeting those obligations at certain periods in the shipping cycles. Therefore, there should be a renewed focus on service contract negotiations and language with respect to allocation of risk in the context of equipment shortages, in particular, those relating to chassis availabilty.

For additional information, please contact Carlos Rodriguez or Joe Orlet.