COVID-19 Forces Logistics Providers to Embrace Force Majeure
CEVA is the latest logistics provider to invoke ‘force majeure’ on all their air, ocean and land transportation contracts, joining the likes of DHL and others in protecting itself from the immense impact of COVID-19 and subsequent government restrictions. Invoking force majeure could exempt the logistics provider for not performing the obligations in a contract (in whole or in part or on time), provided the COVID-19 does constitute a force majeure event. The rising cases of such declarations from parties such as third-party logistics providers, port authorities and others have only increased the uncertainty for shippers over the delivery of products.
The Case For Force Majeure: COVID-19 Is Making It Difficult for Logistics To Deliver
As the pandemic continues to spread across more and more nations, stringent containment measures in the form of social distancing or lockdowns have only bolstered the call for invoking force majeure clause. For instance, in the U.S., the truck transportation market is running at less than 25% capacity. Logistics service providers are facing a major struggle to get drivers willing to drive to highly-affected areas. The risk of getting sick, stringent checkpoints by the police or military and long wait-times at pickup and delivery are causing are causing a delay of at least 1 or 2 days. These factors will have a short-term spike in spot rates for FTL transportation, especially in highly-affected areas.
Furthermore, the grounding of passenger flights in response to COVID-19 has resulted in a critical shortage of air space. For example, Europe to USA belly capacity has dropped by nearly 90%. Meanwhile, ocean freight is reeling under a high number of blank sailings, especially across Europe and the U.S., forcing logistics providers to pass on higher demurrage and detention charges or equipment rental fees. This has simply exacerbated existing volatility in international freight routes.
How Does Force Majeure Impact Suppliers?
Declaration of force majeure by the logistics service provider could impact shippers in-terms of risk ownership, increased cost or changes to agreed service performance. Shippers may be forced to accept any modification in the agreed service rates and any added surcharges for some agreed duration. Shippers may not be able to then hold the service provider responsible for delays in the delivery of goods or dissatisfaction over the performance of any obligations. Shippers who are working with non-asset-based logistics providers, such as freight forwarders, are more likely to face the force majeure situation as they tend to have very little control over transportation assets such as trucking or air capacity.
Final Courses of Action Will Be Decided by the Fine Print
As there is no uniform concept of force majeure, the wording of the contract will decide whether the COVID-19 could qualify as a force majeure event. However, there is a silver lining for shippers who plan to enter logistics contracts after the WHO declared COVID-19 as a global pandemic, as they may not be forced to abide by the force majeure claims of carriers. Hence, such shippers should first understand the terms of their contracts and review the extent to which clauses could exempt the service provider’s service requirements. Shippers should scrutinize the relevant evidence such as timing during which difficulties in performance were reported or any measures taken by the government during the COVID-19 event. Also, to protect from such unprecedented events in the future, shippers should focus on the force majeure clauses to reduce risk exposure when entering the contract with the service providers.