Ocean Transportation Intermediaries: How Three and a Half Years of 'Deregulation' Have Impacted Ocean Freight Forwarders and Non-Vessel Operating Common Carriers

This paper addresses recent legal developments in the ocean transportation intermediary industry, focusing on the impact of legislation which redefined administrative and regulatory parameters governing this sector. It also speaks

to liability and other topics which are at least indirectly connected to these regulatory issues.

The Ocean Shipping Reform Act of 1998, amending the Shipping Act of 1984 ("OSRA")1, was implemented on May 1, 1999. OSRA combined ocean freight forwarders and non-vessel operating common carriers ("NVOCCs") for most purposes under one administrative category labeled "ocean transportation intermediaries" ("OTIs").

Because the Transportation Lawyers Association and the Association for Transportation Law, Logistics and Policy traditionally have focused primarily on the rail and trucking transportation modes, attention is given at the outset to OTI nomenclature as compared to that of surface intermediaries. An ocean freight forwarder is roughly the equivalent of a surface transportation broker, in that these entities do not issue bills of lading taking responsibility for the safe transportation of cargo.2 Rather, brokers and ocean freight forwarders serve primarily as conduits, matching their shippers' needs with appropriate carrier and other transportation services.

NVOCCs are largely the equivalent of surface freight forwarders.3 Both of these entities are "carriers to shippers and shippers to carriers." They consolidate cargo, issue bills of lading to their customers taking responsibility for safe delivery, and are subject to cargo liability regimes in the event of a loss.

Complicating this semantic incongruity is the fact that many transportation intermediaries operate in several capacities with regard to both ocean and surface transportation, often within a single through movement. It is crucial to those in this segment of the transportation industry, as well as to practitioners who represent or are adverse to them, to be cognizant of each variety of intermediary's legal particulars.4

Background

Common carriage's genesis was during the Roman Empire. The perceived dangers of collusion between carriers and selected shippers, whereby carriers would agree with certain shippers not to transport their competitors' freight, prompted a regulatory regime that would allow commerce to expand.

Similarly, as America's industrial revolution materialized during the nineteenth century, the indispensability of transportation freely available to all U.S. enterprises that require it became evident. Unfettered access to transportation, it was deemed, was essential to nurture the competitive industrial economy which eventually would support our country's foundation. Common carriage, with its legally enforced system of tariffs mandating that ocean carriers offer their services to the public at large without favor toward any consumer, therefore became a precept of the American transportation system. This system was appropriate at the time of the Shipping Act of 19165, and for decades thereafter.

However, its fundamental flaws surfaced as our industrial economy developed into its present-day status. Common carriage fails to take into account economies of scale; the impacts of uniform pricing and service options on allocation of carrier resources; the economic reality that the small account is expensive and difficult to service; modern business practices; and human nature as it pervades the business process.

Designed and urged upon Congress by American-owned international water carriers (when there still were two) and larger shippers represented by the National Industrial Transportation League ("NITL"), OSRA's adoption in October 1998 was hailed as "deregulation" of the ocean shipping industry. The legislation, by and large, sounded the death knell of ocean common carriage as the predominant mechanism by which international water carriage is accomplished. It achieved this by incentivizing shippers and ocean carriers to contract freely with each other.6 The Shipping Act of 1984 had allowed shippers and carriers to enter into service contracts, but subject to two significant provisos (there also were numerous less significant ones) that created tremendous business obstacles to mutually beneficial and profitable contractual relationships.

First, a carrier could offer shippers freight rates which were not included in the carrier's tariff (filed with and enforced by the U.S. Federal Maritime Commission ("FMC")), but only if the carrier agreed to offer those same rates to "similarly situated" shippers. This condition became less-than-affectionately known as "me-too rights" on the part of the similarly situated shippers who sought comparable rates. Second, essential terms of all service contracts carriers and shippers entered into were made publicly accessible, so that non-tariff rates were known to other shippers who might want to exercise their me-too rights accordingly.7

OSRA eradicated these two provisos as a part of its goal of promoting service contracting over common carriage.8 Now, carriers are not even able to file tariffs with the FMC.9 Service contracts still have to be filed, but the FMC keeps their pricing terms confidential. Similarly situated shippers are not even supposed to know the freight rates agreed to in their competitors' service contracts, and they can no longer demand the same rates.

OSRA, per its preamble, is designed to "place a greater reliance on the market place" in shipping economics than was allowed by common carriage.10 A full explanation of how OSRA accomplishes this is beyond this paper's scope, but the consequences of merchants having to offer the same terms to every customer, regardless of circumstances, are readily apparent. Numerous other modifications to the prior shipping law further encourage contractual relationships based on market conditions.

OSRA was touted by many as "deregulation" of the ocean shipping industry, given the tremendous decrease in federal regulatory provisions resulting from the move away from common carriage. The FMC's role in ensuring compliance with rate enforcement issues is a fraction of its task pre-OSRA. But "deregulation" is a misnomer, most especially in the context of OTIs. Extensive regulations still govern shipping economics and the relationships that realize them. The FMC, though its activities have been curtailed, remains a significant force in devising, implementing and enforcing shipping policy.

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