Coronavirus – The legal impact on international supply chains


Coronavirus – The legal impact on international supply chains

The coronavirus outbreak represents an unforeseen and uncontrollable event.  The global focus is rightly on the human impact and in an effort to limit the spread of the virus, Governments are taking measures that are significantly impacting international trade.  These measures are shutting down the world’s manufacturing hub and the impact may be felt for months.

The legal implications of the coronavirus will come down to a mixture of the terms of the relevant contracts, which country’s law applies, and the actions of the parties.

Likely impacts – supply contracts

The natural consequence of an extended business closure in China together with restrictions on the movement of people and cargo will be the failure to supply goods by the nominated date, or at all.  This could be caused by an inability of a Chinese manufacturer to obtain materials, extended factory shut downs, delays in obtaining required documentation or inability to ship goods to Australia.

The end result is a failure by the supplier to deliver goods when promised.  Losses could be the loss of purchase monies paid and/or the consequential loss of profits resulting from the non-delivery or delayed delivery.

What does the contract say?

Force Majeure Clause

The first step is to review any written contract and identify if it contains a force majeure clause.  This is a clause that will enable a party to avoid performance of an obligation where that performance is affected by the occurrence of an event beyond that party’s reasonable control.  The coronavirus and the resulting Government action, is likely to satisfy most force majeure clauses.

However, this is not the end of the matter.  Force majeure clauses usually require the effected party to give notice of the force majeure event and take reasonable steps to mitigate the impact of the force majeure event.  Further, the force majeure event cannot be used as to excuse non-performance disconnected from the coronavirus.

Governing law

If there is no force majeure clause the governing law become even more important.  Under Australian law a force majeure clause will not be automatically implied into the contract.  However, as set out in the alert from our Chinese Interlaw partners, Zhonglun W&D Law Firm  a force majeure clause will be implied under Chinese law.

Australian importers wishing to make a claim against Chinese suppliers will need to consider the extent to which such a claim would be enforced by a Chinese Court.

Frustration

The law does not hold parties to contracts where completion becomes impossible due to an unforeseen event.  In such a case the contract may become frustrated and be automatically terminated from the point of frustration.  Due to unexpected Government imposed shutdowns and restrictions on the international movement of people, some contractual obligations may now be impossible to perform.  This is most likely to be the case for time sensitive obligations.

However, it is all about timing.  What was an unforeseen even in January, may not be in February.  Frustration cannot be claimed where a party is aware of a risk and elects to take that risk.

Contracts of Carriage

The coronavirus has had an immediate impact on the movement of goods through Chinese ports.  With the dramatic reduction in passenger flights, air-freight options are reduced.  Further, there are increased instances of goods being unloaded at nearby ports for future transhipment to China.  This means delays and increased logistics costs.  Those costs will come in the form of storage, container detention and transhipment expenses.

Freight forwarders

Under most contracts of carriage, the shipper, and not the carrier, will be liable for these unexpected additional costs.  For freight forwarders we recommend the following:

  • as early as possible make your customers aware of the potential for extra costs;
  • where possible provide guides as to those additional costs, such as daily detention and storage costs;
  • seek written agreement from the customer that it is aware of the costs and agrees that it will be liable for these costs (a letter of indemnity is best);
  • take what steps are reasonably possible to try lower the cost; and
  • depending on the customer and risks involved, consider obtaining security from the customer for the expected costs.

Legal rights are much more likely to be enforced where the customer was made fully aware of the potential costs and their legal liability for those costs.  Early and upfront disclosure is much better than the tactic of not raising the issue in the hope that the issue will go away.

Shippers and consignees

If the shipment of goods is delayed and/or unexpected costs are incurred, as a first step we suggest informing your insurers.  Whether costs associated with delay are covered will depend on the wording of the policy.

It is important to also notify insurers if goods are delivered to a different port than expected.  This is because insurance coverage may end on the discharge of the goods, even if it is not at the intended port.

Shippers and consignees should make an early assessment regarding potential costs.  It is all too common to see storage and container detention charges exceed the value of the relevant goods the subject of the original dispute.  If the length of disruption remains uncertain, it may be prudent to take whatever steps are necessary to unpack goods into cheap storage and return containers that incur costly daily fees.

The message is clear – communicate and take reasonable steps to limit costs

While much is in the hands of Government bodies, there are still some actions that can be taken by parties to improve their circumstances.  Reviewing contracts, notifying other parties of the impact of force majeure events, terminating contracts that can longer be performed, moving goods to cost effective storage away from ports are all steps that should be taken early.

Whether the issue is in Australia or China, Hunt & Hunt through our network of Interlaw firms can help you assess and mitigate the consequences of the Government response to the Coronavirus.