On a previous supply chain minute I focused on a topic I’ve discussed on the show before which is force majeure as a direct impact of Covid-19. This is something I highlighted earlier in February on the show, as I believe it will have long lasting effects across industries so let’s dive deeper into what it means and what’s happening globally with force majeure declarations.
Force majeure- what is this? The general contracting language for this clause reads something like this: Neither party shall be liable to the other for failure or delay in the performance of its obligations under this Contract to the extent that this is caused by matters beyond the reasonable control of the party affected, which in short means if either party cannot meet their contractual responsibilities due to extenuating circumstances force majeure can be declared without any penalties.
Force majeure is a clause that generally protects the organizations in case they cannot conduct business according to the pre-agreed terms due to an unforeseen event out of their control. What this means for individuals is that if we purchased a service, such as an airline tickets or hotel stay, and due to any situation covered by force majeure the business could not provide the service, consumers cannot hold the business legally responsible if this is invoked. In this situation, consumers may have other options like taking a credit for later use, and hope this is an isolated, one-time event. For international businesses, however, the situation is different.
This brings to mind an earlier instance when force majeure declarations were widespread, during the 2014-2015 International Longshore and Warehouse Union (ILWU) strikes affecting 29 US ports and impacting global trade. The negotiations between ILWU and the Pacific Maritime Association lasted many months leading to port closures, chassis shortages, container ships stranded at distant anchorages, and racking up tens of thousands of dollars a day in contractual demurrage and detention charges. After months of turmoil global organizations impacted resorted to invoking the force majeure clauses within their contracts.
At the time I was working with a global manufacturer and distributor of home textiles with printed licensed graphics such as NBA, NFL, NHL and Disney. Some may recall, the port strike did not conclude until after the holiday retail season in the spring of 2015, and once things got “back to normal” our company was stuck with hundreds of containers full of holiday merchandise, as many other retail distributors. In our case the product was Frozen themed home textiles stuck in shipping containers at ports across the West Coast. This inventory was slated for holiday sets in large retail stores, but given the port delays the good were released months later. Raw material suppliers, manufacturers, carriers, and freight partners had declared force majeure so there was nowhere to turn as holding costs for obsolete inventory continued to grow. During that time the situation was somewhat isolated, now we are looking at a far greater number of organizations who may resort to force majeure declarations.
When organizations declare force majeure, ripples are felt throughout the entire supply chain. The current pandemic has pushed global organizations to invoke force majeure clauses- let’s see what’s impacting global supply chains?
- DHL Global Forwarding– has declared force majeure first for it’s Europe- Asia trade routes, however later in March this was extended globally. With this declaration DHL has reserved the right to make changes to all or a part of its air and ocean services.
- Ceva Logistics has put forth a declaration stating that under current circumstances any previously agreed rates and charges can change, and additional surcharges can be applied through invoking their force majeure clause.
- Royal Enfield one of the oldest motorcycle manufacturers globally has been impacted, announcing that their force majeure clause may extend beyond the 21 day lockdown that India has declared.
- The Chinese government issues force majeure certificates to over 1,600 organizations with specific focus in the gas and oil, textile, mining and machinery industries. Below is a breakdown of the allocated certificates by sector.
- India has become the center for force majeure declarations after the country announced a 14 day quarantine on all goods coming from China or any other impacted nation; these delays are specifically impacting the energy sector and the country’s imports of liquid natural gas.
- Sports- will a force majeure clause determine if the NBA is required to pay the players for a season that has not been played and the current decision to postpone.
- Global trends show force majeure are more prevalent in emerging markets and with significant impact to the energy sector– this can have long lasting effects on local supply chains and bottom of value chain contributors.
- The mining sector has seen a high number of organizations declare force majeure impacting mining operations as well as suppliers who are unable to make deliveries of product already ordered.
Some force majeure clauses specifically exclude pandemics and global health crises, others will explicitly include these- when was the last time you checked this contract clause? Will this lead us to think differently when negotiating supplier and vendor contracts in the future?