Surcharge compliance in international maritime shipping

By Frank Cao and Shang Tao, AllBright Law Offices
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International container shipping freight rates are the remuneration for maritime cargo transport services made by liner operators, including maritime freight and surcharges. The rates are regulated by the market and are determined by liner operators based on their transport operation costs and supply and demand in the shipping market in accordance with industry practice or international conventions.

曹放 Frank Cao 锦天城律师事务所 高级合伙人 Senior Partner AllBright Law Offices
曹放
Frank Cao
锦天城律师事务所
高级合伙人
Senior Partner
AllBright Law Offices

Maritime shipping surcharges are mainly used to remedy additional costs incurred by the liner company. Under the 1974 United Nations Convention on a Code of Conduct for Liner Conferences, a liner conference may impose surcharges to cover sudden or extraordinary increases in costs or losses of revenue. These are only to be temporary and must be reduced in accordance with improvements in the situation or circumstances, and cancelled as soon as the situation or circumstances cease.

Yet Chinese consignors (cargo owners), now more familiar with liner shipping, are no longer concerned with the amount of the surcharge, but, increasingly, the reasons why they are being imposed.

尚涛 Shang Tao 锦天城律师事务所 律师 Associate AllBright Law Offices
尚涛
Shang Tao
锦天城律师事务所
律师
Associate
AllBright Law Offices

Disputes between consignors and liner companies are on the rise. They can be traced to a lack of clarity as to the form and definition of surcharges, as well as the consignors themselves, who are beginning to question: Are surcharges, which are supposed to be temporary, becoming more permanent costs?

Lack of clarity

To use the relatively controversial terminal handling charges (THC) as an example, exercitors (ship owners) tend to believe that THCs are primarily to offset various operational costs the carrier accumulates on shore, and that standards for imposing THCs should be based on the lump sum handling fee at Chinese ports.

Consignors, however, tend to feel that liner shipping is by nature the receipt and delivery of goods, including the handling of goods. Its scope is extended to providing transportation services from the sea to inland, e.g. container yard to container yard (CY-CY), and the THC should therefore be included within the basic freight costs. Further, the THC can often be higher than the lump sum handling fee.

No clear explanation

The UN convention characterizes surcharges as temporary, yet does not set out a clear explanation as to what costs can be imposed as surcharges. Liner companies are quite likely to make use of asymmetrical access to industrial information as a result, and abuse their dominate position to impose a variety of surcharges.

In the Regulations on International Maritime Transportation (2003) as well as related announcements, China has demanded that liner companies file their tariff schedules (e.g. ocean freight costs and freight-related surcharges) in a prescribed format with the relevant transportation departments so as to ensure that the tariffs are regular and reasonable.

They further clearly set out that maritime surcharges only be used to offset additional increases in costs and be revoked or reduced when the situation or circumstances compelling that increase cease.

The law provides that compensating for additional costs must not be used as an excuse to charge or increase surcharges indefinitely, so as to confirm the temporary nature of the surcharge. Were the surcharges to continue, import and export trade activity of Chinese consignors would be adversely affected, in particular the efficiency and competitiveness of those exporting low-value goods.

Exercitors and consignors have contrasting positions regarding shipping surcharges due to their disparate interests. The following are a few recommendations with regards to compliance to prevent shipping monopolies from arbitrarily charging fees, as well as to ensure that maritime surcharges are kept at a reasonable level.

Recommendations

Actively disclose what makes up the surcharge. It is international practice for liner companies to impose surcharges, however the companies should report and announce their freight charges to the public in a timely manner in accordance with Chinese law. They should provide data that support the surcharges and clarify their project costs. Any reported price increases should include ample documentation, and all data should have a reasonable margin of proof. This makes freight charges open and transparent, and would aid consignors in having a clearer picture of the specific costs that go into the surcharges.

Consignor and industry associations. The divide between consignors and exercitors is mainly reflected in the disparity between their economic strength, bargaining power and knowledge of the market. Chinese consignors are in a weak position compared to liner companies and conferences. Should consignors wish to negotiate for consultation mechanisms such as greater speaking rights or an equal foothold, they need to establish consignors or industry associations. Industry associations would be able to negotiate with liner conference organizations and demand that they provide information on which the surcharges are based, enter consultations, research agreements and even resolve disputes over shipping issues.

Direct government intervention. At present, Chinese transportation departments merely demand that liner companies file cargo tariffs in accordance with the Regulations on International Maritime Transportation and the Measures for the Implementation of Detailed Records for Freight Rates of International Container Liners, and urge that tariff fluctuation be kept within a reasonable range. Yet were liner companies and conferences to jointly impose or increase surcharges the consignors would have only the option of enduring the tariff due to pressures of trade and a lack of bargaining power. By that point, it would be too late for the competent government agencies to take appropriate protective measures so the entire import-export sector and the overall interests of Chinese shipping would suffer.

Government agencies should take more initiative by, for example, establishing related working groups. The groups could regularly look into the surcharge costs within their purview and compare the tariff schedules filed by the shipping companies as the occasion demands.

Agencies could also conduct audits into the circumstances and conditions behind the surcharges and issue ex officio announcements requiring that shipping companies revoke or reduce their surcharge rates where they do not comply with the provisions of the UN convention, or with industry and international practices.

Frank Cao is a senior partner and Shang Tao is an associate of AllBright Law Offices in Shanghai