What is “Force Majeure” and What Does It Mean for Your Logistics Business?
What is “Force Majeure” and What Does It Mean for Your Logistics Business?
Due to the extenuating circumstances caused by the worldwide spread of Coronavirus, the term “force majeure” has been circulating widely in social media feeds, online ads and logistics industry publications. Major global shipping and logistics companies such as CEVA Logistics and APM Terminals have recently invoked “force majeure” clauses in agreements with their customers. Large companies generally have the necessary legal advice and insight to react to disruptive events proactively, but what about those businesses who don’t have such resources, or who are simply too busy fighting for survival to “read the fine print”? CoLoadX has gathered insights that can help logistics companies understand how to protect themselves, and their customers, from the business risks that come with unforeseeable events.
Understanding the Unforeseeable
Simply put, “force majeure” is an unforeseeable event, or set of circumstances, that prevents someone from fulfilling a contract. It’s implications go far beyond the world of shipping, and can affect any contract between two or more parties.
In logistics, and specifically within containerized ocean shipping, the general cause for a “force majeure” event arises when a freight forwarder or NVOCC is unable to obtain space on a vessel, maintain pricing that was previously agreed upon in contracts with their customers, or avoid surcharges imposed by the carriers. What distinguishes a “force majeure” event from normal “peak season” or excess demand for container capacity, however, is the unforeseeable nature of the event that causes failure of performance in a contract.
Force Majeure isn’t just applicable to the performance of a carrier or ocean transport intermediary, however. Shippers who normally make volume commitments to justify the pricing and service levels they receive from their freight forwarders and NVOCCs are equally affected. Events such as natural disasters or pandemics can lead to production shut downs, order cancellations or other such stoppages that prevent them from meeting their volume commitments. Such performance failures can result in the agreed upon pricing and service levels to be withdrawn by the freight intermediary or carrier.
It Happens...
So what’s the problem? A disaster occurred, everyone’s been affected, no one is claiming malfeasance, why not simply get back to work as usual? This is where matters can get very difficult for Ocean Transport Intermediaries (OTI’s, as forwarders and NVOCCs are described under U.S. Federal Maritime law).
According to ocean shipping industry expert Steve Ferreira of Ocean Audit, Inc. the problem of defining “force majeure” begins with the terms and conditions that an OTI (freight forwarder or NVOCC) has in the service agreement with their customers.
“When the OTI invokes the ‘force majeure’ clause, it does not automatically relieve them or the shipper (BCO) from all [performance] aspects of the agreement. For example, many NSA’s (NVOCC Service Agreement) lack adequate provisions on what “Force Majeure” means to the actual volume shipped or if rates go “X” percent higher than the contract rates.” says Mr. Ferreira, who specializes in helping companies recover millions of dollars in shipping cost refunds due to ambiguous terms stated in shipping contracts every year.
What this comes down to is the fact that there is no “one size fits all” approach to defining a ‘force majeure’ event, and for logistics companies who specialize in meeting the needs of complex supply chains and international trade regulations, this should come as no surprise.
So what can a freight forwarder or NVOCC do to make sure that they are appropriately addressing risks in a manner that also looks out for their client’s best interests?
While the first step for any forwarder or NVOCC is to consult a lawyer with expertise in NVOCC Service Agreements (NSA’s), there are some universal guidelines that Mr. Ferreira recommends an OTI should incorporate into their agreements with customers:
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Definitions - Every service agreement should have a “force majeure” clause, and the events that trigger this clause should be defined as “external, unpredictable and irresistible”. No clause or no definition of it equals no protection.
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Pricing Protections - “Will the contract contain any "force majeure" clause on pricing, which would allow for unforeseen events that could affect rates?”. Again, the key determinant of change will be an “unforeseen event”. Pricing changes that are unrelated to unforeseen events such as General Rate Increases, Peak Season Surcharges, etc. wouldn’t be covered by such clauses as they are part of the normal course of business in the ocean freight industry.
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Mutual Benefit - OTI’s and their customers should have a clear understanding of the impact “Force Majeure” clauses will have on their business in advance of implementing the agreement. “Have parties considered clearly defined "Force Majeure" clauses that are mutually agreeable to both sides for conditions that could affect performance?” Mr. Ferreira asks.
While everyone agrees that unforeseeable events are inevitable, it’s absolutely critical for freight forwarders and NVOCCs to make sure that they can protect themselves and the best interests of their customers by taking a proactive approach to planning and documenting their customer agreements.
By: CoLoadX on April 23, 2020, 3:27 p.m.