COVID-19: frustration and force majeure in the logistics industry

As this is a fast moving topic, please note that this article is current as at 23/03/20. For further information, please contact Chris Chatfield.

As the pandemic now known as COVID-19 takes hold, governments have reacted in a number of ways to try to stem the spread of the disease. This has included a degree of quarantine, closure of ports and borders and isolation of individuals thought to be either infected or at risk of infection.

Impact on the logistics industry

Such measures inevitably have an impact on business and the logistics industry is a business which is particularly vulnerable to such events. Some elements are hit by reduced demand as people are told to stay away from public meeting places. Some are hit by a sudden demand for certain products (toilet paper, pasta and pain killers seem to be the UK’s top sellers at the moment!).

Aside from the immediate retail market, however, the logistics industry is particularly hit by problems at borders and ports. As these close or face restrictions, this can give rise to extended transit periods or cargo becoming locked up in quarantine zones. This then gives rise to the inevitable claims for delay and deterioration of cargo.

Moreover, as drivers and other staff self-isolate or are otherwise unable to attend work, it can become increasingly difficult for forwarders to meet their contractual requirements. Equally, however, as low supplies of raw materials and staff absences take their toll, those using the logistics industry can find it difficult to meet minimum order requirements or provide the goods to fill pre-booked containers. They may also find orders cancelled, even after goods have been shipped.

It is at this stage that the parties consider their legal position. Often, the parties will use terms such as “force majeure” and “act of God” - suggesting that events are completely outside their control. The first is a French expression which does not, on its own account, form part of English law. The second is an interesting theological question which is probably best debated outside the court room.

What the parties mean to ask, can often boil down to two questions:

1. Whether English law will excuse the parties by considering the contract frustrated?
2. Whether a party can rely on a force majeure clause within the contract to excuse ongoing performance issues?

We shall consider the English courts’ approach to both concepts.

Frustration

English law will excuse the parties from performance of a contract if the nature of the contract is “fundamentally” altered or “radically different”. That has proved to be a pretty high test to satisfy and English courts have been reluctant to excuse parties from performance on the basis of frustration. A party will not, for example, be excused simply because it turns out that the contract becomes economically unattractive to one party.

In a logistics and forwarding environment, it is likely that restrictions on movement of goods will result in increased costs of operating. Such increases are likely to have a very substantial impact on the profitability of contracts and may even result in some companies within the industry making substantial losses. Nevertheless, unless this fundamentally changes the nature of the contract, it appears that the English courts will continue to hold parties to their bargains.

It is possible that some circumstances associated with COVID-19 will equate to such a fundamental change. If regions become completely shut or borders close and this prevents any delivery (as opposed to making it more difficult or expensive), that may well constitute a frustrating event. Moreover, if the method and route of carriage are of fundamental importance to the contract, then route closures may give rise to a “fundamental” change to the contract. Much will depend on what the contract says in this regard. If the forwarder simply has a blank canvas to move goods from A to B, it may find it far more difficult to allege that forced route alterations relieve it of its obligations.

Force majeure

In light of the limited opportunities at English law for a party to extricate itself from its obligations, contracts frequently contain a force majeure clause. This will, typically, seek to excuse the parties from on-going performance of certain obligations under the contract in the event of certain circumstances. Shorter form clauses often refer to events beyond the control of either party. Longer form clauses often list certain events which will trigger the operation of the exemption.

Such clauses are sensible insofar as they seek to relieve the parties of the very literal (and sometimes harsh) approach adopted by the English courts. However, such clauses are, in effect, exclusion clauses and will be interpreted reasonably restrictively by English courts. The extent and effect of the clause will depend upon the width of the drafting.

In the logistics and forwarding industries, parties may indeed find that the impact of COVID-19 is to substantially increase costs of performance. For example, if a port or a border is closed, it may still be possible to transport and distribute goods to their intended destinations - but it may simply cost more to do so.

If the force majeure event is brought about (either wholly or partly) by a party’s negligence, then many force majeure clauses will be insufficient to excuse the defaulting party from performance. Where resources are limited, a party may decide to allocate those resources to one contract to the detriment of another. Such a “sacrificial” choice may also frustrate a party’s attempts to rely on a force majeure clause.

If a forwarder sends a consignment through a restricted area when alternatives are available (perhaps in ignorance of the local conditions) or is otherwise at fault for failing to avoid ports or areas in which restrictions are in place, it is quite possible that such decisions could result in the forwarder being unable to rely on a force majeure clause.

It must also be remembered that many force majeure clauses seek to excuse ongoing and future performance, often after service of a notice. They do not necessarily seek to excuse past breaches of contract. If a force majeure clause contains a notice provision, the English courts will expect a party to adhere to this carefully before it can rely on the exemptions available under the clause. Of course, if a party is trying to excuse the loss or deterioration of cargo which has already occurred, it is unlikely to have served a notice in accordance with the clause. That being the case, if a party anticipates problems arising from COVID-19 which may give rise to an event covered by the force majeure clause, it should serve notice in accordance with the clause and not wait until cargo has suffered loss or damage before doing so.

In case of loss or damage to cargo, the parties may need to fall back on limits of liability and exclusions within the conventions (if these apply) or within their contractual arrangements, should such limits be incorporated. A forwarder seeking to avoid liability for loss or delay caused by a government’s reaction to COVID-19 may still have to establish that it took all reasonable care in its custody of the goods notwithstanding other events which were outside its control. It is clear that if a container becomes caught up in delays, quarantine or other such issues, the forwarder may still have an ongoing duty of care towards the cargo and will not be relieved of its obligations just because the initial problem occurred outside the forwarder’s control.

Conclusions

Whilst it is clear that the issues created by COVID-19 are commercially challenging, English law does not see this as relieving a party of its contractual obligations. Parties to a contract can expect to be held to their obligations unless there is a fundamental change - and this is not easy to establish.

This (sometimes harsh) literal approach is often tempered in contracts by use of a force majeure clause. Such a clause can provide the parties with greater opportunity to be excused from events which cause a contract to be commercially unattractive. However, English courts will apply a strict interpretation to such clauses and will require the parties to adhere to their terms closely. Moreover, such clauses will not always relieve a party of liability in relation to loss or damage to cargo which has already occurred.

It is important for parties to review any force majeure clauses carefully to ensure that they are familiar with notice provisions and any other requirements some time before they face claims for delay or deterioration of goods.

Read others items in Marine Brief - July 2020

Related item: Coronavirus charterparty briefing – Q&A