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COVID-19: Are You Ready for Force Majeure Declarations?

Turmoil in Shipping

COVID-19’s effect on the shipping industry is indisputable — quarantines, travel restrictions, disrupted transportation, closed factories, strained supply chains, backed up cargo at terminals and warehouses, and two million ocean containers idled in late February alone. Many forwarders and vessel operating carriers have had firsthand experience with this disruption over the last several weeks. When global crises affect parties’ ability to perform under contract, whether because of war, terrorism, or a global pandemic, lawyers have traditionally turned to force majeure clauses to mitigate unforeseeable liability and infeasible obligations.

“Force majeure” is a French term that literally means “superior force,” but is most often recognized as the clause in your contracts that is rarely discussed, invoked or even noticed. A traditional force majeure clause states that neither party will face liability for breaches if unforeseen Acts of God (e.g., earthquakes, hurricanes, etc.) or of governments or regulatory bodies (e.g., war, etc.) prevent a party from performing under contract. The types of unforeseen circumstances that can trigger a force majeure clause, however, will depend on how it is written. This is particularly true in cases like the coronavirus, where the United Nations World Health Organization declined to characterize COVID-19 as a pandemic until just recently.

Don’t Get Whipsawed

In determining the effect, if any, of a force majeure clause, first look to see if your Bill of Lading Terms and Conditions and general forwarding services Terms and Conditions contain such a clause. If not, they should. If they do have a force majeure clause, the next question is how broadly the clause is drafted, i.e., is it exclusively limited to an enumerated list of potential circumstances, or is it more broadly written to address unforeseen eventualities. Put differently, is the force majeure clause only triggered when one of several named events takes place?

Preferably, the force majeure clause in your terms and conditions will be without limitation, providing an inclusive list of possible triggering events as well as “other causes reasonably beyond the party’s control.” Otherwise, any circumstances that are not listed in the clause may be deemed to fall beyond the scope of its protection. Even if the clause is open-ended (i.e., without limitation), a company will have a much stronger case for invoking force majeure if the disruptive event at issue is specifically named. For these reasons, it may be prudent to add quarantine, pandemic, and public health emergencies to your force majeure clauses, and make the lists illustrative rather than exclusive. Before coronavirus, the world grappled with an H1N1 flu pandemic (2009) and SARS (2003). Unfortunately, it stands to reason that another global outbreak may lurk on the horizon.

If the force majeure clause in your Bill of Lading Terms and Conditions is properly drafted to cover all unforeseeable circumstances outside the forwarder’s control that might prevent the forwarder from performing, this clause may protect you from obligations to your customer.

At the same time, forwarders sign a number of agreements under other party’s terms and conditions, like vessel operating carriers, warehouses, and logistics companies. In these cases, force majeure clauses may protect counterparties that are unable to perform. It is important to review these terms as well, to determine which parties may be able to escape liability for COVID-19 related non-performance.

Most importantly, a forwarder can be left holding the bag if it is caught between strong force majeure clauses in others’ agreements and inadequate force majeure in its own terms and conditions. This is a prudent time to review your force majeure agreements and determine if you are protected from disruption on current shipments and how you can strengthen your position moving forward.

 

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