“This is a black swan event and I don’t think we’ve seen anything like it in recent history, in terms of the economic and supply chain impact in China and across the globe.” – John Evans, Managing Director of Tractus Asia.
The COVID-19 outbreak signifies an unanticipated and overwhelming event, so far infecting almost five million people worldwide and resulting in the death of at least 300,000 (and noting that these figures will tragically be materially out of date as soon as this article is published). Naturally, the global focus is on the human impact, with measures being taken by governments to limit the spread of the virus.
Such measures are having a significant impact on international and domestic trade and logistics. Actions by government authorities in quarantining areas and shutting down businesses and restricting movement have caused significant disruption to supply chains around the world.
Businesses who are themselves or have suppliers or customers that are adversely affected by the consequences and responses to the COVID-19 outbreak will be considering their contractual and insurance positions in terms of events that fall outside their control. In particular, those businesses will look at the impact of COVID-19 on supply, shipping and logistics contracts, including on force majeure and other exceptions clauses, and contract frustration.
This article will discuss a number of the ways in which supply, shipping and logistics contracts are likely to be affected by the virus and what steps businesses can take to respond during this critical period.
Supply contracts and force majeure clauses
Businesses that are facing difficulties in fulfilling their existing contractual obligations are carefully reviewing their supply contracts. The disruptions and particularly the authorities’ responses to the virus may well be covered by force majeure clauses.
Generally, the term “force majeure” is not defined under the common law. This concept is created contractually by an express agreement for the purpose of determining how risk is to be allocated should part or non-performance occur as a result of certain specified events, or events beyond the control of one or more of the parties to a contract.
Importantly, whether one party is entitled to rely on a force majeure clause will typically turn on the definition of ‘force majeure event' in the contract. The circumstances amounting to a force majeure event will be expressly listed in most contracts.
If a business is seeking to invoke force majeure, it must consider carefully whether it is able to do so under the relevant agreement. A party could be in breach of contract, risk termination and potentially damages claims if it fails to meet its obligations and cannot rely on force majeure, or if it invokes force majeure and ceases to perform when it is not entitled to do so. To successfully invoke force majeure, your business will also need to ensure compliance with any other contractual obligations that may include providing prompt and correct notice and mitigating any loss that might otherwise be suffered.
It is equally important to proactively consider whether your counterpart might be able to rely on a force majeure clause to delay or avoid its performance obligations, so that you can prepare for this possibility and assess in advance whether it will impact your arrangements further downstream.
The impact of the COVID-19 outbreak remains uncertain and any business that seeks to recover losses for non-performance by counterparts affected by the virus should carefully review the scope of any force majeure clauses in their contracts.
There are a number of ways in which charterparties, whether time or voyage charters, are likely to be affected by COVID-19 and its impact on economic activity. For example, ships at many ports are experiencing delays in discharging since original bills of lading have not reached the discharge port on time due to the obvious difficulties faced by local courier services.
Delays may result in large demurrage liabilities for ships that are voyage chartered. Some charters contain express quarantine clauses. For instance, the Asbatankvoy charter clauses exclude charterers from liability due to the delay that ordinarily is the result of quarantine being imposed after charterers have given owners voyage orders.
If a ship encounters delays by reason of quarantine or is forced to deviate due to an infected crew member, the ship may be able to be placed off hire, depending on the wording of the charterparty. For example, charterers may be able to establish an off-hire event if the working of the vessel is prevented as a result of a large number of infected crew members, as constituting a “deficiency of men”. In such cases, and by way of example, the NYPE 1946 form at clause 15 provides a simple “net loss of time” exemption to hire payments where an off-hire event arises. Under that clause, no hire is payable for the time lost caused by “deficiency of men … or by any other cause, preventing the full working of the vessel”. This net loss of time clause has in general been viewed as being ‘pro-owner’ because a charterer must establish the occurrence of an off-hire event resulting in a net loss of time.
In the shipping context, owners are generally indemnified under Protection and Indemnity (P&I) insurance for losses that arise from crew death or illness, quarantine fines and cargo losses. P&I will not usually cover commercial losses that result from lost time, lost hire or deviation. It may however extend to delay related to cargo loss that is connected with the exercise of force majeure.
Businesses should also look at their insurance coverage to see if there is cover available under a business interruption policy.
Businesses that are in the supply chain and are impacted as a result of the COVID-19 outbreak should carefully consider if they, or their counterpart, can rely on an exemption or force majeure clause in order to relieve them from any delay, failure or inability to perform their contractual obligations or avoid any additional cost arising from such circumstances. Businesses are advised to be proactive in reviewing their contracts in order to determine who bears relevant risk or costs and/or when one party might be excused from performance. By taking early steps, your business can stop this black swan from flying.