May, 2018
Liquidated Damages: a Penalty
in all but Name
Mark K. Neville, Jr.
Most faithful readers of this column are aware that the importer into the United States must meet a “reasonable care” standard that is imposed under the customs laws.1
If warranted, the civil penalty will be assessed after Customs and Border Protection (CBP) has determined there has been a violation. The penalty level sought will be consistent with the level of presumed culpability.3
Importers and their advisers are familiar with “Section 592” penalty cases, and all readers should also be mindful of that regime. It is especially important to note that Section 1592 provides for a “prior disclosure” of the violation to CBP, i.e., a disclosure which is made before the importer has knowledge of an investigation by CBP.4
In addition to the risk of imposition of civil penalties—and to criminal jeopardy and seizures as well, when the circumstances support such consequences—the importer and others involved in the entry of merchandise also run the risk of liquidated damages being assessed.
These are not penalties, in a technical sense, but rather demands in defaults of contractual obligations. That may be true but it is also true that they have the same practical effect as a penalty. The transgressor must still dig into its pockets and make a payment to CBP. We should pay attention to them, because they are imposed on an expedited basis and are really in the nature of fines levied because of the party’s failure to meet its bond obligations.
And that brings us to bond requirements.
Bonds can be either single entry or continuous, in the latter case it will cover all transactions during a set period, usually a year. The amount of the bond is usually a function of the type and value of the merchandise, with the lowest level of a continuous importer’s bond set at $50,000. Bond premiums are typically 1% of the coverage, thus there would be an annual premium of $500 for a $50,000 bond coverage.
The presence of a surety bond is a major reason why CBP can be relaxed about importers and others meeting their obligations, since a failure to do so will trigger a liquidated damage claim. What customs matters are covered by surety bonds?
To start, there is a basic importation and entry bond, pursuant to which the importer and surety agree, inter alia, to
Apart from the garden variety importation and entry bond, there are bonds in place for many other customs activities. These include some of the following customs activities:
As befits the contractual patrimony of the liquidated damage claim, CBP is under no obligation to issue notices of such claims to the broker, who is typically provided with notices of liquidation, refunds, and bills. For liquidated damage claims, however, CBP communicates directly with the importer and the surety via CF 5955A 9
Apart from the circumstances already noted, liquidated damage claims are frequently the subject of or generated by defaults to properly extinguish bond obligation in the context of “TIB” entries, temporary importations under bond, whereby the importers eschew and are freed from the need to make a payment of customs duties because they obligate themselves to re-export the imported goods within one year.10
There is a degree of forgiveness at play in the process. As has been recounted in a 2011 ruling,11 the customs regulations12 provide that extensions of the time for exportation of merchandise imported under a TIB may be granted by the appropriate district director upon written application on CBP Form 3173. Section 10.37 provides that untimely requests for an extension of time for exportation are to be referred to CBP Headquarters.
Generally, extensions based upon untimely requests are only granted when: (1) the articles covered by the entry remain in the country; (2) there is no evidence of use of the articles contrary to the terms of the bond; (3) the applicant is not a chronic violator; (4) there is no evidence of a lack of due diligence in complying with the law and regulations; and (5) there is a reasonable explanation of why the application was not timely filed.13
CBP has sanctioned untimely requests for extension when the importer provided a reasonable explanation for the untimely request. For example, we have held that an extension was warranted when it was shown that the employee who was responsible for the TIB suffered the death of her husband.14 CBP has not granted relief in situations where the TIB expired due to personnel change.15 Similarly, CBP has not granted relief when the responsible employee was so busy with other tasks that he or she did not keep track of the TIB expiration.16
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Reasonable Care and Civil Penalties
In one form or another, other jurisdictions apply a similar standard. Failure to meet this obligation could result in the imposition of a civil penalty, which in the US would most often fall under Section 592 of the Tariff Act of 1930, codified at 19 USC § 1592. That commercial fraud statute is based on the use of false or misleading documents to enter or introduce merchandise.2If warranted, the civil penalty will be assessed after Customs and Border Protection (CBP) has determined there has been a violation. The penalty level sought will be consistent with the level of presumed culpability.3
Importers and their advisers are familiar with “Section 592” penalty cases, and all readers should also be mindful of that regime. It is especially important to note that Section 1592 provides for a “prior disclosure” of the violation to CBP, i.e., a disclosure which is made before the importer has knowledge of an investigation by CBP.4
In addition to the risk of imposition of civil penalties—and to criminal jeopardy and seizures as well, when the circumstances support such consequences—the importer and others involved in the entry of merchandise also run the risk of liquidated damages being assessed.
These are not penalties, in a technical sense, but rather demands in defaults of contractual obligations. That may be true but it is also true that they have the same practical effect as a penalty. The transgressor must still dig into its pockets and make a payment to CBP. We should pay attention to them, because they are imposed on an expedited basis and are really in the nature of fines levied because of the party’s failure to meet its bond obligations.
And that brings us to bond requirements.
Surety Bonds
Most actions associated with importation require the posting of surety bonds by the subject party. The purpose of the bond is to protect the revenue and to assure compliance with the customs laws.5 The bond itself is a three-party contract, with the principal being the importer or other party, the surety which must be a company selected from an approved list being the underwriter of the debt and the beneficiary being CBP. The principal and surety are joint and several obligors. For my non-lawyer readers, “joint and several liability” means that multiple parties can be held liable for the same event or act and be responsible for all restitution required. In other words, the liable parties would be required to pay the entire damage award, which might be split among multiple parties or might come from just one party. CBP could demand full payment from the importer or, if the importer has “disappeared” or is insolvent, CBP could demand full payment from the surety.Bonds can be either single entry or continuous, in the latter case it will cover all transactions during a set period, usually a year. The amount of the bond is usually a function of the type and value of the merchandise, with the lowest level of a continuous importer’s bond set at $50,000. Bond premiums are typically 1% of the coverage, thus there would be an annual premium of $500 for a $50,000 bond coverage.
The presence of a surety bond is a major reason why CBP can be relaxed about importers and others meeting their obligations, since a failure to do so will trigger a liquidated damage claim. What customs matters are covered by surety bonds?
To start, there is a basic importation and entry bond, pursuant to which the importer and surety agree, inter alia, to
- file an entry in a timely fashion
- pay all duties and fees
- produce documents and evidence if the goods are released conditionally
- redeliver merchandise6
- keep goods available for examination by CBP.7
Apart from the garden variety importation and entry bond, there are bonds in place for many other customs activities. These include some of the following customs activities:
- Basic custodial service
- International carriage
- Repayment of erroneous drawback payments
- Control of containers and instruments of international traffic
- Foreign trade zone operator
- Production of bills of lading
- Commercial gauger and commercial laboratory operations
Bond Violations
If there has been a bond violation, such as a failure to file a timely entry, to take a simple example, CBP can issue a liquidated damages claim. The statute of limitations for the vast majority of such claims, including an untimely entry, is one year from the date the right of action accrued.8 The statute does not run if the violator is outside the US. Thus, if the principal in an import/entry bond is a non-resident importer of record, the statute of limitations will not run. Nor will the statute run if facts material to the right of action are not known by CBP.As befits the contractual patrimony of the liquidated damage claim, CBP is under no obligation to issue notices of such claims to the broker, who is typically provided with notices of liquidation, refunds, and bills. For liquidated damage claims, however, CBP communicates directly with the importer and the surety via CF 5955A 9
Apart from the circumstances already noted, liquidated damage claims are frequently the subject of or generated by defaults to properly extinguish bond obligation in the context of “TIB” entries, temporary importations under bond, whereby the importers eschew and are freed from the need to make a payment of customs duties because they obligate themselves to re-export the imported goods within one year.10
There is a degree of forgiveness at play in the process. As has been recounted in a 2011 ruling,11 the customs regulations12 provide that extensions of the time for exportation of merchandise imported under a TIB may be granted by the appropriate district director upon written application on CBP Form 3173. Section 10.37 provides that untimely requests for an extension of time for exportation are to be referred to CBP Headquarters.
Generally, extensions based upon untimely requests are only granted when: (1) the articles covered by the entry remain in the country; (2) there is no evidence of use of the articles contrary to the terms of the bond; (3) the applicant is not a chronic violator; (4) there is no evidence of a lack of due diligence in complying with the law and regulations; and (5) there is a reasonable explanation of why the application was not timely filed.13
CBP has sanctioned untimely requests for extension when the importer provided a reasonable explanation for the untimely request. For example, we have held that an extension was warranted when it was shown that the employee who was responsible for the TIB suffered the death of her husband.14 CBP has not granted relief in situations where the TIB expired due to personnel change.15 Similarly, CBP has not granted relief when the responsible employee was so busy with other tasks that he or she did not keep track of the TIB expiration.16
Effect of a Liquidated Damage Claim
If CBP issues a liquidated damage claim, typically through a CBP Form 5955A (CBP 5955A), it is not subject to review under the protest procedure of 19 USC § 1514.17 Instead, the importer or other concerned party may either pay the specified amount within 60 days or file a petition and seek to pay a lesser amount.18 In the latter case, the importer or other concerned party would invoke mitigating circumstances (e.g., new and inexperienced importer, cooperation with CBP, small number of violations, contributory CBP error, low value import).Conclusion
Perhaps it would be helpful to think of liquidated damages as payments demanded by CBP for failures to meet the administrative or procedural obligations that are created by surety bond commitments rather than penalties levied on substantive violations such as false or erroneous tariff classification, customs valuation or origin declarations connected with an entry. Still, as noted, the effect is the same. The importer or other affected party must pay for its inaction....................................................................................................................
1. In the US, the statutory basis for the imposition of civil penalties for a failure to meet “reasonable care” standards is 19 USC § 1484 (a).
2. To be sure, there are other specific penalty statutes, such as for failure to manifest controlled substances and those which apply to specific persons (brokers) or activities (e.g., duty drawback and recordkeeping).
3. There are three levels of culpability-- negligence, gross negligence and fraud.
4. 19 USC § 1592 (c) (4).
5. 19 USC §1623, 19 CFR Part 113.
6. See 19 USC § 141.113, ruling no. 962748 (4/24/00).
7. 19 CFR §§ 113.62 (a)- (k).
8. 28 USC § 2415.
9. See ruling no. 225110 (4/20/94).
10. 19 CFR §§ 10.31-.40.
11. Ruling no. H121389 (8/29/11)/
12. 19 CFR § 10.37.
13. See ruling no. 222843 (12/10/90).
14. See ruling no. 219659 (7/8/87).
15. See ruling no. 223699 (5/15/92).
16. See ruling no. 222800 (2/4/91).
17. See, e.g., ruling no. 228844 (9/18/00) (A demand for liquidated damages is not listed in the statute as protestable. Indeed, the United States Court of International Trade (Halperin Shipping Co., Inc. v. United States, 14 CIT 438; (1990 CIT); Pope Products v. United States, 15 CIT 279, (1991 CIT); Playhouse Import & Export v. United States 18 CIT 41 (1994 CIT)), and the United States Court of Appeals for the Federal Circuit (United States v. Toshoku America, Inc., 879 F. 2d 815, 818 (Fed. Cir. 1989)); have acknowledged that a demand for liquidated damages is not a Customs decision that is protestable under 19 U.S.C. §1514).
18. Pursuant to 19 CFR § 172.2.
2. To be sure, there are other specific penalty statutes, such as for failure to manifest controlled substances and those which apply to specific persons (brokers) or activities (e.g., duty drawback and recordkeeping).
3. There are three levels of culpability-- negligence, gross negligence and fraud.
4. 19 USC § 1592 (c) (4).
5. 19 USC §1623, 19 CFR Part 113.
6. See 19 USC § 141.113, ruling no. 962748 (4/24/00).
7. 19 CFR §§ 113.62 (a)- (k).
8. 28 USC § 2415.
9. See ruling no. 225110 (4/20/94).
10. 19 CFR §§ 10.31-.40.
11. Ruling no. H121389 (8/29/11)/
12. 19 CFR § 10.37.
13. See ruling no. 222843 (12/10/90).
14. See ruling no. 219659 (7/8/87).
15. See ruling no. 223699 (5/15/92).
16. See ruling no. 222800 (2/4/91).
17. See, e.g., ruling no. 228844 (9/18/00) (A demand for liquidated damages is not listed in the statute as protestable. Indeed, the United States Court of International Trade (Halperin Shipping Co., Inc. v. United States, 14 CIT 438; (1990 CIT); Pope Products v. United States, 15 CIT 279, (1991 CIT); Playhouse Import & Export v. United States 18 CIT 41 (1994 CIT)), and the United States Court of Appeals for the Federal Circuit (United States v. Toshoku America, Inc., 879 F. 2d 815, 818 (Fed. Cir. 1989)); have acknowledged that a demand for liquidated damages is not a Customs decision that is protestable under 19 U.S.C. §1514).
18. Pursuant to 19 CFR § 172.2.
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.