The Named Account Rate Conundrum
Client Alert
Acting on behalf of the National Customs Brokers and Forwarders Association of America, Inc. (NCBFAA), we recently sent a White Paper to the Federal Maritime Commission (FMC) addressing the commercial and regulatory issues arising out of the vessel operators’ (VOCCs) handling of cargo moving under existing, valid service contracts. The thrust of the paper was our belief that many VOCCs are acting in violation of 46 USC §§ 41102(c) and 41104(a)(2) by refusing to accept bookings for so-called named accounts at the contract rate when space is tight, requiring that NVOCCs instead agree to accept far higher FAK, spot or GDSM rates.
Since the inception of the service contract freedom provided by the Ocean Shipping Reform Act of 1998 (OSRA), most if not all of the vessel operating common carriers (VOCCs) have entered into what are supposedly binding service contracts with their shippers (including non-vessel operating common carriers, NVOCCs), but in reality reserving for themselves the ability to change rates whenever they see fit notwithstanding the specific rates and charges memorialized in those agreements. The carriers feel free to do so by relying upon unilaterally set tariff-based rate increases, surcharges, general rate increases, etc. Similarly, many if not most of the VOCCs have in practice refused bookings and/or rolled cargo if they deemed it more profitable to accept higher rated cargo for a particular sailing.
This illusory nature of VOCC service contracting practices has been exacerbated during the past decade through the use of so-called Named Account (NAC) rates. In its simplest form, the NAC permits the VOCC to offer differential rates to its various customers, depending on its assessment of market factors. When applied to its NVOCC customers, however, the NAC device inappropriately intrudes into the NVOCC’s market by limiting competitive rates through specific NACs to several (or hundreds, depending upon the size of the NVOCC) NVOCC customers and creates significant commercial problems when those rates are not honored.
There are a number of ways the NAC mechanism is practiced by the VOCCs. The most elementary form is to simply offer a rate for each NAC. Other carriers may require the NVOCC to have two contracts, one in which the NVOCC customer is listed as a NAC at a favorable (i.e., competitive) rate, and one in which the customer’s cargo can be moved at higher GDSM or FAK rates. The VOCC’s apparent concept is that an NVOCC’s cargo will generate some revenue balance over the course of the year with other cargo, so that it will accept some bookings at the lower NAC rate and some at higher rates.
This contract objective becomes largely meaningless, however, when there are space constraints, which has been the current situation for some time due to COVID, trade tariff factors, the carriers’ blank sailings and cancelled vessel strings. The FMC has approved consortia agreements authorizing the carriers to collectively agree to blank sailings, which may be justifiable when there is significant excess carrier capacity due to reduced demand. That, however, is not the existing situation. Currently, there is a significant shortage of capacity, which has enabled the VOCCs to substantially raise rates on spot market cargo. Indeed, the American Shipper reported in its July 7, 2020 edition that spot market rates are 72% higher than at this point two years ago.
While the carriers’ pricing on spot market cargo may possibly be defensible legally, even if it is — to use the American Shipper’s words — “price gouging,” their policies concerning cargo that should be permitted to move at the agreed NAC rates are problematic. At times, which is the current situation, many VOCCs engage in various devices to bypass their contractual commitments, such as:
- Accepting bookings involving an NVOCC customer with a favorable NAC rate for only a unilaterally established, arbitrary and limited percentage, such as 20%, 30%, 50%, etc.; the NVOCC must then move the rest of that customer’s cargo at higher spot or FAK or GDSM rates, at times even if those higher rates are not provided in that or another service contract;
- Requiring NVOCCs to split a shipment involving multiple containers into a part moving at the NAC rate and a part at an FAK rate requiring the NVOCC to issue multiple house bills of lading (HBLs), increasing documentation and customs clearance fees in addition to the increased freight charges;
- Imposing an extra fee, as a price for accepting cargo, sometimes through a new tariff charge and sometimes without any tariff authority at all;
- Limiting bookings to the MQC divided by 52 in order to impose a non-contractual maximum weekly allocation for the NACs listed;
- Simply refusing to accept bookings at all for a given customer.
These ratios and practices are not hypothetical. They vary from carrier to carrier and from customer to customer, but they do exist and are enforced. The carriers carefully track the NVOCC’s bookings to ensure that they meet some internal revenue/sailing goal regardless of the contract or the effect on the NVOCC. And, FAK, GDSM and spot rates have been escalating to further disadvantage NVOCCs that quoted rates to their customers in reliance of the pricing established in service contracts and who now must deal with the obvious consequences.
The adverse consequences for NVOCCs by these practices are severe. To remain economically viable, businesses —including NVOCCs — must price their services to customers at a level sufficient to at least cover the costs. As many if not most NVOCCs are required to make long-term commitments to their larger customers, they must necessarily rely on the assumption, which is reasonable in every other industry, that the VOCCs will honor the terms of the negotiated service contracts on both the cost and service commitments. But, as many VOCCs have concluded that they are free to arbitrarily determine not to accept cargo at service contract-based NAC rates and instead compel NVOCCs to move up to 80% of its NAC customers’ cargo at FAK or spot rates, or bear new surcharges or even non-tariff based charges, the economics for the NVOCC no longer work. The difference between an NAC and an FAK, GDSM or spot rate can be $1,000 per container.
NVOCCs are understandably reluctant to complain individually to the FMC (or even to the carriers), as they fear the consequences of being the “squeaky wheel.” Unfortunately, the tariff/service contract provisions of the Shipping Act combined with the agency’s enforcement of those contracts has created a situation not contemplated when VOCCs were given contracting freedom in OSRA. Having a system where VOCCs simply refuse bookings at contracted rates while holding NVOCCs to strict adherence to whatever the carriers elect to charge is manifestly unfair and inconsistent, if not directly contrary, to the spirit and letter of the Shipping Act.
Returning to the illusory nature of service contracts, it has long been obvious that the carriers are able to use the combination of service contracts and tariff rates in a way in which, for most contracts, the rate stated in the contract has little to do with what charges will ultimately be assessed. Through surcharges, GRIs or just individual rate changes, a shipper or NVOCC has little way of knowing what rate will be assessed one month or nine months into the contract year. This fact has been understood and the market has generally adjusted, notwithstanding understandable grumbling from NVOCCs and beneficial cargo owners.
The misuse of NAC rates by the carriers has had a more pernicious effect, however. Now, many VOCCs simply won’t accept contract-based bookings unless the contracted rate is essentially thrown out for 20%, 50% or 80% of the NAC cargo in favor of much higher rated cargo. The combination of illusory rates made possible by unilateral tariff changes along with artificial or even natural space constraints has made it possible for VOCCs to generate significant profits during these periods. While, at the same time, NVOCCs become vulnerable to either their customers or to potential liability from the FMC under the Act if they attempt to mitigate the significant adverse consequences by attempting to by-pass the arbitrary booking/pricing restrictions and changes imposed by the carriers.
The White Paper requested that the FMC initiate an investigation into this issue with a view to restoring the proper use of the contracting authority that was granted to the VOCCs under the Ocean Shipping Reform Act of 1998. The White Paper concluded with the statement that the NCBFAA “believes that the administration of the Shipping Act should not be a one-sided exercise by which the principle of the integrity of the contracting process is applicable to only one of the contracting parties.”
At this point, it is not clear what action — if any — the FMC may take. We nonetheless believe that the agency should recognize how the reality in the marketplace does not necessarily fit neatly into the regulatory structure Congress and the FMC contemplated when the Shipping Act was amended in 1998 by the Ocean Shipping Reform Act.