FMC grants NVOCCs the right to negotiate shipper contracts

Feb. 14, 2005
On December 15, 2004, following a trend for all other transportation modes, the Federal Maritime Commission (FMC) ( issued final regulations

On December 15, 2004, following a trend for all other transportation modes, the Federal Maritime Commission (FMC) ( issued final regulations permitting non-vessel-operating common carriers (NVOCCs) to enter into contract arrangements with shippers. These new regulations became effective on January 19, 2005.

Under these regulations, NVOCCs may enter into contracts with shippers to arrange for the transportation of goods between the U.S. and international locations via ocean carriers.

Previously NVOCCs could arrange for the transportation of goods only in accordance with tariffs each published. The tariffs were subject to regulation by the FMC, although in recent years the FMC has rarely become involved in issues related to the rate level an NVOCC established in a tariff.

While tariffs would theoretically apply to all similarly situated shippers, in practice it has been somewhat difficult for shippers to access the tariffs of at least some NVOCCs to determine what they actually contain. The tariffs may also be worded in a rather narrow manner so that particular rates are actually available to only one or two shippers. Quite often logistics managers will rely on the representations of the NVOCC as to its applicable tariff rates and never actually examine the tariff itself.

For years vessel-operating common carriers (VOCCs) — those who actually have ships on the seas — have been able to enter into contract arrangements with shippers, as well as having tariffs. These contract arrangements are now the most common method for goods to be transported by VOCCs.

Just what is an NVOCC? An NVOCC is a common carrier, meaning that it is responsible for loss, damage or delay of the goods. It issues its own bill of lading and makes arrangements with VOCCs, port agents, local carriers and others for movement of the goods. Up to now, all of the charges for these services would be in accordance with the NVOCC's tariff.

If something goes wrong with a shipment handled by an NVOCC, the shipper looks to the NVOCC, not the VOCC or other entity involved, for compensation concerning lost or damaged goods. The shipper pays the NVOCC, who in turn is responsible for paying everyone else in the chain. While NVOCCs were not allowed to have contract arrangements with shippers until the new rules became effective, they could contract with VOCCs. To a VOCC, an NVOCC is the shipper.

NVOCCs are not ocean freight forwarders. A forwarder is another type of transportation service provider altogether. They are, however, often confused. A forwarder can assist a shipper in arranging for international transportation services, but it is not a carrier. It has no tariffs and does not issue a bill of lading in its own name. If a shipment is lost or damaged, a forwarder can assist the shipper in recovering for the loss but cannot itself be responsible.

The same legal entity can function as both an NVOCC and an ocean forwarder in accordance with licenses issued by the FMC. To avoid problems a shipper should determine which type of entity it is dealing with before goods are dispatched. Under the Shipping Act they are both ocean transportation intermediaries.

The new NVOCC contracting rules enable an NVOCC to negotiate individual contracts with shippers. Rates can vary from shipper to shipper. All NVOCC/shipper contracts are filed at the FMC, but are confidential and not disclosed by the FMC. Parties to the contracts may make disclosure if they so desire.

There is an "essential terms" publication requirement. NVOCCs must make public certain terms of a contract. However, rates are not one of these essential terms. It doesn't matter that most people in business think that price is the most essential thing in a deal — the FMC does not, so the rates to be charged do not have to be disclosed.

NVOCC/shipper contracts are not available for spot shipments. Under the rules, the shipper must make a commitment to provide a certain minimum quantity or portion of its cargo under the contract. In the alternative, it could commit to tender a minimum portion of its freight revenue. In either case, the shipments must be over a fixed period of time. In turn the NVOCC has to commit to a certain rate or rate schedule, and the service levels it will provide must be defined.

Freight consolidators have long sought the ability to contract with shippers as NVOCCs. Now they have it. This makes available to the logistic professional another process for arranging for the movement of goods. It will mean heightened negotiating skills and careful attention to the details to be able to take advantage of this new opportunity.

James Calderwood is a partner with the law firm of Zuckert, Scoutt & Rasenberger L.L.P., in Washington, D.C., where he concentrates on transportation matters. He can be reached at [email protected]. This column is designed to provide information of general interest. It cannot substitute for indepth legal analysis of particular problems. Readers are urged to seek counsel concerning individual situations.

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