Fiduciary Responsibilities of Ocean Freight Forwarders Compared to NVOCCs

It is crucial to understand the type of relationship you have with someone, i.e. the duties and/or responsibilities owed to a party based on their interaction. Today we are taking a look at the fiduciary relationship, questions regarding which arise during Federal Maritime Commission (FMC) audits.  A fiduciary relationship is defined as, “a legal duty to act solely in another party’s interest.  Parties owing this duty are called fiduciaries, and the individuals to whom they owe the duty are called principals.”[1] Essentially, fiduciaries have a duty to act in the best interest of the principal, and this duty is breached when they make decisions based on self-interest or self-gain.   We are going to examine how this fiduciary relationship applies differently to the two types of FMC-licensed Ocean Transportation Intermediaries (OTIs): ocean freight forwarders compared to Non-Vessel Operating Common Carriers (NVOCCs).

A freight forwarder is a person or company which organizes export shipments. You can think of forwarders as travel agents for cargo; they book freight on a carrier on behalf of a client/shipper. A good forwarder will contact various carriers to find the most reasonable price for their client. They have a fiduciary responsibility to clients imposed on them by the FMC, meaning all decisions a forwarder makes must be in the best interest of the client.  Forwarders make their living based on a disclosed fee they charge; it covers the due diligence of shopping around different carriers as well as handling the booking and other documentation.  Ocean freight forwarders are required to disclose their fees along with the costs and any profit, and their invoices must invite inquiry.  See 46 CFR 515.32(d):

“The following notice shall appear on each invoice to a principal: Upon request, we shall provide a detailed breakout of the components of all charges assessed and a true copy of each pertinent document relating to these charges.” 

Since they are acting as an agent for a shipper and a fiduciary relationship does exist, there must be a high level of transparency with freight forwarders.

This is absolutely not the case with NVOCCs.  There is no fiduciary relationship between an NVOCC and its customer, and as a result they do not have to disclose their costs.  NVOCCs make their living by purchasing space on a vessel at a discounted price, and then reselling this space.  Vessel space is their inventory.  Since they are purchasing at a discounted price, NVOCCs create competitive advantage by reselling the space at a price lower than would the vessel operator.  Like anyone else selling from inventory, NVOCCs have no obligation to disclose the price they originally paid, and they are able to charge a mark-up when reselling.  NVOCCs have no fiduciary responsibility, but they do carry more liability because they issue contracts for carriage.  They must decide that the benefit of charging a mark-up is worth the additional risk imposed by the issuance of a bill of lading.

It is true that freight forwarders and NVOCCs interact and overlap in many ways, but it is critically important to understand the fiduciary difference in the types of relationships that exist between these two OTIs and their clients.

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