On April 11, 2014, the Surface Transportation Board (STB) issued its final demurrage rules (the “Rule”) establishing the circumstances under which public warehouse operators and others will be liable for demurrage charges. In this article, warehouse legal expert John Horvath provides the history of the reason for the Rule, a discussion of the Rule itself and what public warehouse operators may do to minimize the adverse impact of this Rule. The Rule, which takes effect July 15, 2014, is at the end of this article.
The Reason for the Rule
Three federal appellate court decisions between 2003 and 2009 addressed whether a public warehouse operator who, without its knowledge or consent, was identified as the consignee on the rail bill of lading, was liable for demurrage charges. Two of those federal appellate court decisions, including the 2009 decision by the United States Court of Appeals for the Eleventh Circuit in Norfolk Southern Railway Company vs. Billy Groves (the “Norfolk Southern Decision”) held that the public warehouse operator who is named as the consignee on the rail bill of lading without its knowledge or consent was not liable to the railroad for demurrage charges. The third federal appellate court decision found that the public warehouse operator was liable under those circumstances.
On April 6, 2010, the Norfolk Southern filed a Petition for a Writ of Certiorari to the United States Supreme Court asking it to resolve the conflicting decisions from the Federal Circuit Courts of Appeals on the demurrage charge liability issue, overturn the 2009 Norfolk Southern Decision and declare that public warehouse operators who are named as consignees on bills of lading, with or without their knowledge, are liable for demurrage charges. On December 6, 2010, the STB, the successor agency to the Interstate Commerce Commission that Congress charged with, among other things, resolving railroad rate and service disputes, published an Advance Notice of Proposed Rulemaking (ANPR) seeking responses to questions about the demurrage process and whether the STB should consider a new rule that would place liability for demurrage charges on the receivers of rail cars, regardless of their designation on the rail bill of lading. Shortly after the STB issued its ANPR, the United States Supreme Court denied Norfolk Southern’s Writ of Certiorari request thereby leaving to the STB the responsibility for promulgating a rule addressing liability for demurrage charges.
IWLA, IARW, other trade associations and several railroads filed comments in response to the ANPR. After reviewing the comments regarding the ANPR, the STB issued a Notice of Proposed Rulemaking (NPR) on May 7, 2012 announcing proposed demurrage rules under which the receiver of rail cars would be liable for demurrage charges and announcing that the protections of 49 U.S.C. §10743 did not apply to demurrage charges. IWLA, IARW, other trade associations and several railroads filed comments in response to the NPR. The STB then adopted the Rule in its Decision dated April 11, 2014.
The STB Demurrage Rule
Liability for Demurrage Charges
The STB Demurrage Rule imposes liability for demurrage charges on the receiver of the rail car without regard to whether the receiver is identified on the bill of lading as the consignee, consignor, the in care of party or some other designation. The Rule provides, in relevant part, as follows:
Any person receiving rail cars from a rail carrier for loading or unloading who detains the cars beyond the period of free time set forth in the governing demurrage tariff may be held liable for demurrage, if the carrier has provided that person with actual notice of the demurrage tariff providing for such liability prior to the placement of the rail cars. The notice required by this section shall be in written or electronic form.
Notice Requirement
Under the Rule, before the receiver would be liable to the rail carrier for demurrage charges, the rail carrier must provide the receiver with actual notice of the demurrage tariff in either written or electronic form before placing the rail cars. The STB Decision states that this notice does not need to be provided before each rail car is delivered, but rather may be a blanket notification that will be effective as to all rail cars placed by the carrier for the receiver after providing that initial tariff notification. The carrier would only be required to provide a new notice of its demurrage tariff in the event of a material change to that tariff. According to the Decision, the carrier need only provide the receiver with the demurrage portion of its tariff and an electronic link to the carrier’s tariff complies with this actual notice requirement.
Defenses Eliminated
Importantly, the Rule eliminates current defenses that public warehouse operators have to avoid liability for demurrage charges. Under current law, the public warehouse operator is not liable for demurrage charges as long as it is not identified on the rail bill of lading as the consignee. If it is identified as the consignee on the bill of lading, it may still, under current law, avoid demurrage charge liability by providing the rail carrier with advance notice under 49 U.S.C §10743 (the Agency Exception) that it is an agent only and has no beneficial interest in the goods. Pursuant to the Rule, demurrage charge liability will be based upon the receipt of the rail cars and not upon any designation on the bill of lading. Therefore, under the Rule, the public warehouse operator will not have any defense to demurrage charge liability based upon the fact that it was not named as the consignee on the bill of lading. The STB, in its Decision, also eliminated the Agency Exception by finding that 49 U.S.C. §10743 does not apply to demurrage charges. Simply put, once the receiver has received the required notice of the rail carrier’s tariff prior to placement of the cars, it will be liable for demurrage charges if it detains the cars beyond the free time.
Constructive Placement and Bunching
The Rule does not address constructive placement or bunching issues which are a significant cause of demurrage liability. The STB, in declining to address those issues in the Rule, stated that constructive placement issues were not the focus of this rulemaking process and therefore declined to elaborate on what would constitute proper notice of constructive placement. As to the bunching issue, the STB stated that it did not believe an adjustment to the Rule was necessary, and that both constructive placement and bunching “are best addressed in the context of individual disputes” presumably to be resolved through the STB’s dispute resolution process discussed below.
Recommendations for Avoiding Demurrage Liability
The STB made several comments in the Decision that are instructive on what public warehouse operators should focus on in addressing potential demurrage liability. The STB noted that it “has the regulatory authority to ensure that demurrage practices are reasonable” and that the Rule is a default rule, which is “meant to govern demurrage in the absence of a privately negotiated contract”. The STB stated that if the receiver believes that the demurrage charges were assessed as a result of unreasonable placement practices or otherwise has a dispute regarding demurrage liability, such disputes can be addressed through the STB’s informal mediation process through the STB’s Rail Customer and Public Assistance Program as well as a formal mediation process and binding arbitration.
Actual Placement Agreement
Since the Rule is a default rule, public warehouse operators should attempt to negotiate an actual placement agreement with the rail carrier, since that would avoid the impact of the Rule. Such an agreement should address, among other things, the warehouse operator’s operational constraints and reasonable requirements regarding the receipt and release of the rail cars. The actual placement agreement is undoubtedly the best solution, since it is a mutually negotiated agreement. Public warehouse operators who are able to negotiate actual placement agreements should be able to avoid demurrage charge liability in most instances.
Notice Letter to Rail Carrier
Absent an actual placement agreement, the public warehouse operator, upon receipt of the rail carrier’s written or electronic notice of the rail carrier’s demurrage tariff, should send the rail carrier a letter articulating all the reasonable operational constraints and other reasonable requirements it has regarding the placement and removal of rail cars (a “Notice Letter”). These reasonable operational constraints and other requirements should include the days of the week and time that constructive placement should be effective (you do not want constructive placement on Friday when you are not open for business on the weekend), the manner of notification to you of the constructive placement, limitations on the number of railcars to be constructively placed at any given time, and other constraints that, without the rail carrier’s compliance would likely cause you to incur demurrage liability. The reason to send such a letter is to encourage the rail carrier to reasonably work with you to allow you to receive, unload and release the rail cars on a timely basis so as to avoid incurring demurrage charges.
The effectiveness of such a Notice Letter is based, in part, upon the Interstate Commerce Commission Termination Act (ICCTA). Prior to the 1995 enactment of the ICCTA, the rail carriers’ tariffs had the force and effect of law under the filed rate doctrine. Just as we are all conclusively presumed to have actual knowledge of all laws, everyone was conclusively presumed to have had actual knowledge of the required provisions of rail carriers’ tariffs. Since the enactment of the ICCTA, carriers’ tariffs are no longer required to be filed and, with that, there no longer is any conclusive presumption of knowledge of the tariff provisions. That is why the Rule requires rail carriers to provide receivers with the carriers’ demurrage tariff as a condition to the receivers’ liability for demurrage charges. Since the conclusive presumption of knowledge of the carrier’s tariff no longer exists, the Rule’s requirement to provide receivers of railcars with a copy of the demurrage tariff in written or electronic form only means that the public warehouse operator (or other receiver) is bound by that demurrage tariff if it does not object. If the public warehouse operator objects and provides the rail carrier with a Notice Letter or other written communication detailing for the carrier the public warehouse operator’s objections to the demurrage tariff and pointing out the reasonable operational constraints and other reasonable requirements the public warehouse operator has regarding the placement and removal of rail cars, the rail carrier will have to address them in some fashion. It is pretty much the norm that contracts are negotiated by one party making an offer and the other party countering that offer. The rail carriers’ issuance of written or electronic notice of its demurrage tariff is the offer and the public warehouse operator’s Notice Letter is the counter specifying the parameters surrounding when constructive placement should be effective as to that public warehouse operator. If the rail carrier ignores the Notice Letter, and the public warehouse operator incurs demurrage liability as a result, the public warehouse operator will be able to have the STB address the issue through its dispute resolution process. The STB may find that the rail carrier’s demurrage practices, that ignore the public warehouse operator’s reasonable requests in the Notice Letter, are not reasonable demurrage practices.
It is unlikely that rail carriers will, on receipt of a public warehouse operator’s Notice Letter, refuse to provide rail services. Under the law, rail carriers are obligated to provide transportation services upon reasonable request and may not refuse to provide such services, merely because it is inconvenient or unprofitable.
Customers’ Responsibility for Demurrage Charges
Public warehouse operators should address responsibility for demurrage charges in their storage agreements with their customers. Both IWLA’s Standard Contract Terms and Conditions and IARW’s Contract Terms and Conditions address the circumstances under which the public warehouse operator will be liable for demurrage charges and state generally that the public warehouse operator is only liable for demurrage if such charge was caused by the public warehouse operator’s failure to exercise reasonable care. Therefore, if the storage agreement with the customer is the standard terms and conditions, the public warehouse operator has some protection from improperly assessed demurrage charges. A similar demurrage provision should be inserted in the storage agreements with those customers who are not warehouse receipt customers.
Conclusion
The STB demurrage Rule takes effect on July 15, 2014 and substantially changes public warehouse operators’ liability for demurrage charges. Provided that the public warehouse operator received the rail carrier’s demurrage tariff prior to receiving the rail cars, it will be liable for demurrage charges simply because it received the cars and did not return them within the free time. The best solution for avoiding unjust demurrage charge liability is to negotiate an actual placement agreement with the rail carrier. Absent an actual placement agreement, provide the rail carrier with a Notice Letter detailing all the reasonable operational constraints and other reasonable requirements the public warehouse operator has regarding the placement and removal of rail cars. Finally, the public warehouse operator’s storage agreement with the customer should address responsibility for demurrage charges.
If you have any questions on this article or any warehouse law issue, please contact John Horvath at 800.511.7710 or jhorvath@hlpc-law.com.
APPENDIX
Docket No. EP 707
For the reasons set forth in the preamble, the Surface Transportation Board amends title 49, chapter X, subchapter D, of the Code of Federal Regulations as set forth below:
PART 1333 -Demurrage Liability
Sec.
1333.1 Demurrage Defined
1333.2 Who May Charge Demurrage
1333.3 Who Is Subject to Demurrage
Authority: 49 U.S.C. 721.
§ 1333.1 Demurrage Defined
“Demurrage” is a charge that both compensates rail carriers for the expenses incurred when rail cars are detained beyond a specified period of time (i.e., free time) for loading or unloading, and serves as a penalty for undue car detention to encourage the efficient use of rail cars in the rail network.
§ 1333.2 Who May Charge Demurrage
Demurrage shall be assessed by the serving rail carrier, i.e., the rail carrier providing rail cars to a shipper at an origin point or delivering them to a receiver at an end-point or intermediate destination. A serving carrier and its customers (including those to which it
delivers rail cars at origin or destination) may enter into contracts pertaining to demurrage, but in the absence of such contracts, demurrage will be governed by the demurrage tariff of the serving carrier.
§ 1333.3 Who Is Subject to Demurrage
Any person receiving rail cars from a rail carrier for loading or unloading who detains the cars beyond the period of free time set forth in the governing demurrage tariff may be held liable for demurrage if the carrier has provided that person with actual notice of the demurrage tariff providing for such liability prior to the placement of the rail cars. The notice required by this section shall be in written or electronic form.
