FMC Clarifies the "Unreasonable Practice" Provision of the Shipping Act
Client Alert
One of the original provisions of the Shipping Act, 1916 was former Section 17 (which became section lO(d)(l) of the 1984 Act and was recodified in 1998 as 46 U.S.C. §41102(c)). This section provided that no regulated entity could "fail to establish, observe and enforce just and reasonable regulations relating to or connected with receiving, handling, storing or delivery of property." And, for over 90 years, this section was interpreted to mean that in order to find that some allegedly unreasonable action had violated the Act, those actions had to be the normal, customary, or repeated practice of the vessel operator, ocean forwarder, or NVOCC. Consequently, a single unreasonable or inappropriate practice by a carrier or OTI would not be a violation of the Act, even if it might otherwise be actionable civilly as a breach of contract or was negligent.
However, over the past several years, a majority of the FMC Commissioners took a more expansive view of this section and, in a series of cases, held that a single act by a regulated entity could constitute an unreasonable practice. These Commission decisions were issued notwithstanding lengthy and vigorous dissents by Commissioner, now Acting Chairman, Khouri, who took great pains to explain why this change of policy was both inconsistent with the intent of Congress and unfair to carriers, NVOCCs and forwarders.
To address this, the Commission issued a notice of Proposed Rulemaking on September 6, 2018 seeking public comment about issuing an interpretive rule to reverse this trend. The NPRM proposed that a challenged practice would need both to be unreasonable and be the normal, customary and continuous practice of the carrier or OTI in order to be found to be a violation of the Act.
Due to the importance of the issue, we filed extensive comments on behalf of the National Customs Brokers & Forwarders Association of America supporting the NPRM. We pointed out that the proposal was consistent with both the legislative history of former Section 10(d)(1) as well as almost 100 years of unbroken precedent. In doing so, we also analyzed the more recent decisions and highlighted the unfairness of making a dispute over a single incident become the basis for awarding substantial damages under the Shipping Act, especially since those damages might well have otherwise not been available to the complainants under normal principles of contract and commercial law. For example, a claimant could bypass the provisions of COGSA by claiming the loss, damage or delay of cargo was an unreasonable practice and seek damages above the $500 per package limitations or even use it to avoid the 1-year limitation period for initiating suit under that statute. Or, claimants could contend, as was the case in one of the more expansive decisions, that the exercise of the contractual lien in an OTI' s terms and conditions was unreasonable and accordingly subject the OTI to an award of damages and attorneys' fees.
In a decision issued and effective December 18, 2018, the FMC agreed with our comments and found that the proper reading of former Section 10(d)(l) requires that a regulated entity must engage in an unjust or unreasonable practice on a normal, customary and continuous basis before being held to have violated the Shipping Act.
This is an important decision because it could reverse the growing trend of having shippers using the expansive view of Section 10(d)(l) to hold forwarders and NVOCCs liable for normal commercial disputes. And, by doing so, avoid limitations in terms and conditions and other statutes and provide a basis for obtaining awards of attorneys' fees that could not otherwise be granted by courts.
The decision was issued in the FMC's Docket No. 18-06, Interpretive Rule, Shipping Act of 1984 and can be viewed on the Commission's website at www.fmc.gov.