COVID-19 and the Trade Community
There are a bunch of other things going on when it comes to international trade, but the most concerning topic right now is the coronavirus or COVID-19. From a purely business continuity perspective, we are receiving lots of inquiries around the following question: “Can we get out of our contracts by invoking the force majeure clauses?” Such a clause allows parties to cancel contracts when events occur which are both beyond their control but also totally unexpected. A typical illustration would be an “Act of God.” First, make sure your contract includes a force majeure clause, because if not, that could present a significant uphill and costly battle. Given the widespread losses which are likely to result, it is reasonable to anticipate companies of any size will, so to speak, “stick to their guns” in trying to “spread the pain.”
Assuming such a clause is present in your contract, what does it say? An example of one recently presented includes among its examples: “… strikes, riots, floods, storms, earthquakes, fires, power failures, natural disasters, pandemics, insurrection, acts of God, or for any cause beyond the control of” the named party. Is that language sufficient to permit cancellation under the current circumstances of the COVID-19 outbreak? Probably so, since it mentions pandemics and the World Health Organization has labeled the outbreak as such, but would this language have been broad enough to cover the situation a month ago? Maybe not.
Then, the question becomes, who can claim the benefits? Does the language in the contract cover both parties or only one? In the case of the steamship lines, the answer is these terms and conditions are typically written to only benefit the carrier. Here is one illustration:
“If at any time the carriage is or is likely to be affected by any hindrance, risk, danger, delay, difficulty or disadvantage of whatsoever kind and howsoever arising which cannot be avoided by the Carrier by the exercise of reasonable endeavors, (even though the circumstances giving rise to such hindrance, risk, danger, delay, difficulty or disadvantage existed at the time this contract was entered into or the Goods were received for the carriage) the Carrier may at its sole discretion and without notice to the Merchant and whether or not the carriage is commenced …”
The carrier then allows itself to either deliver the goods to the port of discharge or place of delivery; suspend carriage and store the goods; or abandon the carriage and place the goods at the Merchant’s disposal. In each circumstance, the carrier reserves to itself the right to be paid for all charges.
Add to that, at least one logistics company is imposing a “Recovery Adjustment” surcharge on the grounds the disruptions in sailing schedules “will most likely result in increased costs associated with managing cargo and equipment.”
In the air context, one airline’s contract of carriage allows it to cancel bookings in the event of: “acts of God, force majeure events, strikes, civil commotions, embargoes, wars, hostilities, or other disturbances, whether actual, threatened, or reported…” This airline defines force majeure events as: “[w]henever such action is necessary or advisable by reason of weather or other conditions beyond [the airline’s] control including, but not limited to, acts of God, force majeure, strikes, civil commotions, embargoes, wars, hostilities, terrorist activities, or disturbances, whether actual, threatened, or reported.” This airline would no doubt argue that public health outbreaks and/or pandemics are included, but there is room to question that conclusion. Again, this is written to favor the airline, not its customers.
There could be similar challenges with insurance policies, so make sure you read your policies carefully, and then consult with your attorney and insurance broker/agent to make sure what is and is not covered. This is true whether you are dealing with carriers or customers, and with customers, of course, their size and value can sometimes become a critical factor in deciding how to proceed. Just keep in mind if you have insurance, limit yourself to what is in the policy. Making payments beyond what the carrier covers will come back to haunt you later. If you are drafting the clause yourself – or your attorney is doing so for you – as we have learned from COVID-19, there is a difference between a public health emergency and a pandemic, even only if that difference is one of degrees. However, that distinction may well be key to whether or not there is the ability to get out of the contract with no or minimal damages and have insurance cover the losses.
In terms of policies, the typical ones to review are property, casualty, and business interruption, but check them all. You may be in entirely different circumstances if someone on your staff becomes infected with the virus. In that situation, there could be property damage as your facilities may be deemed contaminated and need to be cleaned before you can reopen, as distinct from sending workers to telecommute and the expected loss of productivity that is likely to result. If you have a policy that deals with supply chain interruption, again its terms need to be carefully read since most deal with physical loss on the part of the insured, and often their suppliers and customers. Is there any physical loss? What other forms of damage are covered?
If you determine there is insurance coverage, think also about how you will quantify and document the losses. What did you do to mitigate those losses?
Finally, here are a handful of questions to start with as traders try to figure out how to respond to the supply chain disruption going on:
Are you able to shift production to another facility? If so, at what cost? On what time line?
In that other location, will there be additional regulatory and other costs and/or delays? What are their impacts?
Are you able to air freight some goods in and, if so, at what additional cost?
How much of your staff can/should/must telecommute? With schools closing in many locations, there may not be much flexibility, but then, is your bandwidth able to handle this likely significant traffic increase?
Who needs to remain in the office so that basic logistical functions continue during the current outbreak? Do you want to/can you organize this on a rotating basis so the employees coming into the office change over time?
Have you activated your business resumption plan?
You also want to keep in mind that if someone on your staff becomes infected, as a general proposition, as the employer, you may not share that information with other employees. The Centers for Disease Control published an Interim Guidance for Businesses and Employers, and stated: “If an employee is confirmed to have COVID-19, employers should inform fellow employees of their possible exposure to COVID-19 in the workplace but maintain confidentiality as required by the Americans with Disabilities Act (ADA).” Since COVID-19 has spread to many different countries, the privacy laws in those countries also need to be considered. For example, the European privacy law – the GDPR – addresses privacy around health data, plus local public health authorities in those countries will have their own protocols to follow.
That leaves one more obvious question: is an employer required to report any sick employees to government authorities? Each jurisdiction has its own regulations, but as a general rule, for right now, the answer in the U.S. remains no, due to the confidentiality obligation. Most likely, as more individuals are tested and the true nature of the outbreak becomes better understood, it is possible that physicians and medical facilities may be required to make such reports or response to inquiries from public health officials, but that does not change employers current obligation to maintain confidentiality about employee health.
Lastly, for now, the Executive Director of the Port of Los Angeles provided a virtual briefing to the trade community last week. He reported that currently there are three (3) 23,0000 TEU vessels scheduled to arrive weekly starting on March 31 with the goal of rotating many of the empty containers at one terminal in Los Angeles and one terminal in Long Beach back to Asia. Beneficial cargo owners in particular may want to insist their carrier of choice do the same. There are reliable reports that manufacturing in China is starting to increase. So it is only a matter of time before those empties are needed and cargo starts to again flow. Starting the process of getting those empties repositioned now is critical to the long term recovery.