The uncontrolled, unprecedented nature of COVID-19 has led countries across the world to go under lockdown. Businesses are forced to close operations and the supply chains are destroyed. Due to this, the shipping industry has seen a steep drop in demand and freight rates as well. Seeing the turn of events, it is likely that COVID-19 constitutes as a Force Majeure event.
Read on to know everything about Force Majeure. Why COVID-19 calls for this clause and its impact on the shipping industry as well as the world economy. And we got some good news at the end as well 🙂
What is Force Majeure?
Force Majeure is a French term that translates to “superior force”. It is a clause found in many logistics contracts. Also called “chance occurrence”, or “Act of God”. It is invoked when the parties are not able to fulfill their obligations due to unforeseen and unavoidable circumstances. Such as war, strike, natural disasters (floods, hurricane, earthquake), riots, acts of government, plagues, epidemics, etc.
The situation calls for a Force Majeure clause only if the events are:
- External (beyond the control of parties)
- Unforeseeable (cannot be predicted or foretold)
- Irresistible (its consequences cannot be avoided)
However, a Force Majeure clause does not act as an excuse for everything. It doesn’t cover when the company fails to perform its duties due to negligence on their part, or costlier alternatives. Also, it cannot be evoked under normal conditions which can be predicted. Such as a storm or an area that is prone to floods.
That being said, Force Majeure is a contractual concept, defined by terms and conditions mentioned between the parties. But, as a precautionary measure, companies do include this clause while signing their agreements.
Why is Force Majeure important for Businesses?
Including this clause in a contract frees both parties. It removes any liability from the companies during catastrophes that are beyond their control. Force Majeure can be a veto power clause that can cover the impossibility of fulfillment of a contract.
COVID-19 and the Call for Force Majeure
The novel coronavirus (COVID-19) has wreaked havoc and has disrupted ‘normal’ life. With WHO declaring COVID-19 as a global pandemic, the gravity of the situation is being realized about its impact on the economies across the world – due to this, businesses and their operations are coming into focus.
These are unprecedented circumstances. The response of world governments to combat the pandemic from spreading has had an unavoidable negative impact on the economy. Consequently, businesses are not able to meet their contractual obligations due to countries imposing lockdown. It restricts movement, production of goods, unavailability of labor – thereby, crushing the supply chain networks.
The impact of coronavirus is not only limited to delays. But also to canceling of shipments due to quarantines and port closures. This has affected logistic agreements, ship-building, construction projects, failure to load goods, or even consignment cancellation.
Seeing the turn of events, it is likely that COVID-19 constitutes as a Force Majeure event.
Companies are coming up with alternative solutions keeping force majeure as the last resort. In our Digitalks we have spoken with Marc Moss, Global Head Business Development from Nippon Express. He gave his view on the current market situation mode shifting and force majeure. You can find the Digitalk here.
Impact on Shipping and the World Economy
As an immediate effect of the COVID-19 outbreak, companies have been forced to shut down operations. Destroying supply chains. Long-term implications remain immensely difficult to foresee, but its immediate domino effect would be felt.
China is one of the biggest markets in the world. And with the country’s limited functioning, the aftermath was felt in the shipping industry and world as a whole. The supply of raw materials was stopped, due to which many industries had to stop output production. Demands fell. The restrictions on the movement led to a steep drop in demand and freight rates in the shipping industry. Shipyards in China have already issued Force Majeure notices to buyers and forwarders long back.
Due to strict lockdowns in many countries, manufacturers failed to receive their shipment. Closed warehouses or due to the unavailability of labor put a stop to delivering commodities. Some ports are open, but operating with a reduced workforce. Due to this, many ports are facing congestion, further reducing capacity for incoming containers. As precautionary measures, some of the ports and forwarders (like DHL) have declared Force Majeure.
The Good News 🙂
With China emerging from the pandemic gradually, a recovery could be forecasted in the container sector. Ports in Italy have returned to normal operations too. Some local ports are open for business (even though on limited capacity). With that goods are flowing and the supply chain is working, if only at a slower pace.
“COVID-19 has just slapped everybody in the face, so get ready because what’s coming is going to be even greater disruption.” (Source)
But, this disruption would also start a series of radical changes in the shipping industry. COVID-19 has illuminated the flawed over-dependence on China for demand and supply. It would lead to diversifying the supply chain routes and increased regionalization. It would also lead to increased investments in freight technologies, like big data analysis, artificial intelligence software, etc. This would help better manage end-to-end supply chains, making way for autonomous shipping.
COVID-19 is bad, we know. But, this disruption has triggered us to think. About the changes necessary that would catapult the shipping industry and the world into a new direction.
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