Interesting Trends in Freight Forwarder Compensation

Hanjin_container_shipNCBFAA Clarifies Forwarder Compensation Guidelines

An interesting trend as discussed by our friends at NCBFAA in a recent Monday Morning eBriefing… A number of it’s members have reported the growing trend by several steamship lines to stop paying forwarder compensation to ocean forwarders.  Some carriers have explained their rationale for doing so is that the use of IT systems to exchange shipping data has somehow reduced the importance of services provided by ocean forwarders.  The NCBFAA’s stance is that this is not the case and that forwarders are often required, for example, to correct data entry errors made by the carriers, just to mention one of the key services that forwarders provide. Other carriers have provided no explanation and just take the position that they won’t continue to pay compensation and simply eliminate their tariff rule providing for the payment of compensation.

Regardless, those lines that have elected to stop paying brokerage have generally used two different mechanisms to eliminate the payment of forwarder compensation.  First, they have removed items from their rules tariffs specifying that required them to pay brokerage.  And, in negotiating service contracts with the shipper customers, they have either intentionally or unintentionally failed to include any provision by which forwarder compensation would be paid.

Historically speaking… As this trend has raised a number of questions from members concerning its propriety, the Association felt it might be helpful to explain what the law does and does not require with respect to this issue.

Initially, going back many years, ocean carriers were not required by law to pay forwarder compensation.  To the extent that they did so, the carriers put provisions in their rules tariffs specifying when compensation was to be paid and the amount.  But, there was no statutory or regulatory requirement that the carriers had to pay compensation to ocean forwarders until the Shipping Act was amended in 1984.  In 1984, Congress for the first time added a provision requiring that two or more carriers or conferences that acted collectively in pricing their services were obligated to pay ocean forwarders a minimum of 1.25% of the applicable ocean freight charges.  Consequently, since a significant amount of traffic was being priced through the collective action of antitrust-immunized ocean shipping conferences, all of that traffic was subject to that statutory requirement that forwarders be paid a minimum of 1.25% of the freight charges.  However, the important thing to remember is that the requirement applied only with respect to collective action by the carriers so that a VOCC that independently priced its services were not required by law at any time to pay forwarder compensation.

 That situation persisted for approximately the next fifteen years until in 1998, when Congress enacted the Ocean Shipping Reform Act (OSRA). That statute significantly changed how international ocean shipping was regulated.  As particularly relevant to this issue, OSRA did several things.  First, it essentially ended the ability of the steamship line to enter into antitrust-immunized conferences.  Instead, the carriers were able to obtain limited antitrust immunity by entering into discussion agreements that permitted them to discuss, but not agree upon, how their services were priced.  So, while the Shipping Act still contains a statutory provision requiring the payment of forwarder compensation by carriers that price their services collectively, the carriers no longer operate through shipping conferences or otherwise set prices collectively.  Moreover, OSRA amended the compensation requirement so that it now only applies to traffic moving under tariffs.

The second significant and related change that took place due to OSRA was that the shipping industry moved from one of common carrier tariffs to a contracting context, where virtually all VOCC pricing was done individually through confidential service contracts.  In other words, OSRA specifically gives the carriers the right to enter into individualized arrangements with their customers.  Consequently, as long as the carriers do not jointly price their services to customers through collectively established tariff rates, the Shipping Act does not require that they continue to pay forwarder compensation.

It is certainly true that ocean forwarders provide valuable services both to their customers and to the steamship lines.  Nonetheless, while the shipping lines are permitted to provide compensation – either in their tariffs or through their service contracts – there is no longer a statutory requirement that they do so.  Instead, forwarder compensation, as is the case with many pricing and service issues due to the deregulatory thrust of OSRA, is now largely a commercial matter.

The NCBFAA recognizes that this could have a significant financial effect on ocean forwarders that rely on the continued payment of forwarder compensation.  However, whether a carrier will pay a forwarder “compensation” or brokerage in consideration of the services a forwarder provides must now be addressed in a forwarder’s individual commercial negotiations with the carrier and/or its customers.

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