As the shipping industry braces for the impact of COVID-19, companies are scrambling to understand how their businesses will be affected by the delay in the global supply chain.
In short, force majeure allows one party to be relieved of contractual obligations due to extreme circumstances outside of its control. While it does not apply to a party's own negligence in the face of a catastrophe, it does apply to both acts of nature (e.g. hurricanes and floods) and acts of people (e.g. wars and strikes).
Most contracts contain a force majeure clause. In the shipping industry, the force majeure clause is usually contained in the bill of lading.
In India, the federal government issued an order declaring the transportation of goods by water an essential service but has also permitted port authorities the ability to declare force majeure.
Earlier this month, DHL Global Forwarding declared force majeure on both its sea and air freight contracts.
Courts have routinely found that generalized economic hardship or a drop in demand does not constitute a force majeure event. While there has been a severe uptick in force majeure certificates issued in China, many are questioning whether they will hold up on the global stage. The majority of trading contracts between China and international parties are governed by English law. Within English law, parties can only claim force majeure during a pandemic if the document includes specific clauses.
However, with the spread of COVID-19, we are seeing an increase of very specific clauses citing diseases as grounds for force majeure. Take for example, the world's largest international shipping organization- BIMCO, which stands for Baltic and International Maritime Council.
BIMCO's Infectious or Contagious Diseases (IOCD) Clauses are only triggered when two pieces of criteria are met to the fullest extent. The two clauses, one for time and the other for voyage charters, were crafted during the 2014/2015 Ebola outbreak. Under BIMCO's definition, an outbreak would have to result in a declaration by a public health authority of a public health emergency.
According to their website, BIMCO considers the COVID-19 pandemic "serious enough to trigger the definition of 'Diseases'" within their clause.
The other clause that relates to the application of force majeure in BIMCO contracts is called "Affected Areas". In the IOCD Clauses, the "Affected Area" refers to not only "a place where the ship calls where a risk of crew infection exists", but also any ports of call away from the infection risk area which may restrict the ship because it has called at a hotspot location for the disease.
Within the oil and gas industry, LOGIC contracts (or contracts modeled off LOGIC) are prevalent. LOGIC stands for Leading Oil and Gas Industry Competitiveness contracts. They were conceived to save costs at a time when oil prices were low like we are seeing today.
They do not contain specific wording relating to pandemics within the force majeure clause. Rather, the force majeure clause includes more generalized language relating to emergencies.
Within LOGIC contracts, however, force majeure could be invoked when there are changes to local law that prevent the fulfillment of duties. For example, if a factory is shut down due to government regulations to prevent the spread of COVID-19, that company could cite force majeure to avoid breaching contracts.
In light of the COVID-19 pandemic, contractors and businesses should review force majeure clauses in order to manage the impact of current events. By being preemptive and clearly understanding force majeure within contracts, companies can minimize the effect of unforeseen circumstances such as COVID-19.