NYSHEX Force Majeure Case Studies From COVID-19
By Jewel Jennings-Wright
ocean freight contracts | Wed, Apr 29, 2020 | 6 Minute Read
Force Majeure remains a hot topic for everyone right now. You might be surprised however, to learn just how low the number of legitimate Force Majeure defaults has been for NYSHEX shipments throughout the current COVID-19 pandemic. NYSHEX members can trust that those two words aren’t taken lightly, and simply stating Force Majeure after a default does not automatically indemnify a party.
To illustrate how NYSHEX evaluates Force Majeure, we developed some case studies pertaining to the COVID-19 pandemic. Each study shows how NYSHEX uses the rules of enforcement found in the Member Handbook to evaluate Force Majeure claims, both directly and indirectly caused by the event.
A note about direct versus indirect causes
When thinking of a direct versus indirect cause, it's helpful to use the ‘ripple effect’ analogy. A direct cause is an event that made it impossible to fulfill a contract, or the stone that dropped into the water. An indirect cause is one that is related to the main event but is a disruption down the line, or the ripple. As direct causes of Force Majeure are typically extreme, and therefore not experienced very often, NYSHEX expects the majority of claimed Force Majeure cases to be indirectly related.
Direct Cause Case Studies
The most apparent instance of a direct cause of a Force Majeure due to COVID-19 would be government-mandated shutdowns. Governmental restraints and acts of God (the disease) are included in the Force Majeure events of Rule 15. (For comparison, an ordinary closing due to poor management or bankruptcy that do not result from disease or other acts of God are explicitly excluded.) Under Rule 13, these events must be made known to NYSHEX within 7 days of discovery.
When a country closes to commercial trade due to COVID-19, neither the shipper nor the carrier is able to import or export from the country. The shipper cannot obtain the required customs clearance and ships are not physically permitted to berth at a port in that country.
In this instance, the contract cannot be fulfilled due to no fault of the shipper or carrier. As a result, under the NYSHEX contract, obligations on both the shipper and carrier are temporarily suspended. When the country reopens the port, the obligations under the contract will be reinstated to the best of both parties’ ability.
Governmental closing of places of work, or workplaces closing due to confirmed employee exposure will also trigger a Force Majeure under a NYSHEX contract. As a result, both parties' obligations under the contract will be suspended until the company reopens. At that time, the obligations under the contract will be reinstated to the best of both parties’ abilities.
Indirect Cause Case Studies
Because of the lack of a direct connection to COVID-19, we must evaluate these claims on a case-by-case basis to ensure that COVID-19 is, in fact, the cause of the Force Majeure event. We verify whether the default could have been reasonably foreseen, mitigated or avoided.
Equipment Shortages and Reduced Factory Production
A carrier may default on a shipper because they were unable to get containers back from China to Chicago. Alternatively, a factory may not be able to fulfill an order due to reduced production leading to a default on the shipper's side.
NYSHEX will review these cases to determine whether these defaults were truly related to the Force Majeure event. A carrier that does not have enough containers due to circumstances surrounding COVID-19 (a named Force Majeure event under Rule 15) will be viewed differently than a carrier that fails to properly manage allocations and prioritize the shipper’s allocation as per the agreement (a violation under Rule 6). Likewise, a shipper that cannot fulfill an order due to circumstances surrounding COVID-19 (Rule 15) will be treated differently than a shipper that can fulfill a shipment but does not (a violation under Rule 3).
Abnormal Trucker Shortages
A shipper may not be able to pick up or deliver a container to a container yard or rail yard due to an abnormal shortage of truck drivers. “Abnormal” is used here because there is already a shortage of drivers in the supply chain.
NYSHEX will review this case to determine whether the shipper could not find a truck driver due to conditions caused by COVID-19. We will request and review such items as communications between the shipper and trucking companies that state the reason for the shortage is COVID-19 (Rule 15). NYSHEX will also look to the mitigations which the shipper implemented to combat this issue. For example, did the shipper leave enough time to contact multiple drivers when planning around the new contingency of COVID-19? (If no, this is a violation under Rule 3.)
Blanked sailings have been on everyone's minds with the continuing pandemic. Many carriers are finding that they have to blank sailings due to the economic costs of sailing a half-empty ship. Though COVID-19 is a novel virus, blanked sailings are not new events. As a result, NYSHEX has already established rules which permit schedule changes (Rule 5). NYSHEX will continue to monitor the situation so that the shipper’s cargo is placed on the first available vessel.
NYSHEX is committed to ensuring that our members are treated fairly when it comes to Force Majeure and the temporarily suspension of obligations under a NYSHEX contract. For more information about how NYSHEX enforces contracts during Force Majeure, check out this recent blog post or send me a message at firstname.lastname@example.org.