We usually write contracts based on good faith and mutual understanding, but we read the contract just two times, once, when we sign it, and the second time, when we encounter a dispute.
The contract should help us settle our disputes cases where amicable negotiation does not work. Unfortunately, COVID-19 will increase trade disputes around the globe.
General effects of COVID-19 on international trade and supply chains
Coronavirus will continue to be a proximate cause for delay and non-delivery of goods and services from previous months to the next few months.
The delays in the supply chain are mainly because of:
- Factory shutdowns and production with low capacity
- Governmental prohibitions and restrictions on export and import
- Drastically increased prices for certain goods
- Transportation and logistics companies’ limitations; and
- Order cancellations by the customers
Companies have responsibility toward societies, employees, suppliers, and customers while still being profitable. This is an exceedingly difficult balance for business owners to handle all of these issues together.
Since the first main consequence of COVID-19 to businesses worldwide is delays in the supply chain, how will these delays effect international trade processes?
Delays in sales and purchase contract
COVID-19 seems to be a case of “Force Majeure”. Force Majeure generally means unavoidable, uncontrollable, and unforeseeable events. And much like some travel insurance providers, insurance companies have the ability to alter the dates around known and unknown hazards. This is why it is so important for companies to fully understand the details of their contracts and coverage.
When a party is encountered with a Force Majeure case, it should be deemed relieved of its duties and obligations, and, therefore, the contract may become suspended or, in some situations, terminated when the Force Majeure case endures over weeks and months, rather than a more limited time period.
Parties should have defined the consequences of termination and suspension in the contracts. What happens to advance payments, consignments, delays, and non-deliveries?
Some parties may abuse the current situation and increase the prices or not deliver the sold goods. In a situation where a party claims that has encountered a Force Majeure, it is expected to mitigate the consequences, notify the counterparty, and provide proving documents indicating that its business is affected by the case.
Delays and Incoterms
Based on the EXW rule, the Seller is not responsible for export and import clearance, but the Seller is expected to deliver the product at the named place. In DDP rule, the Seller is responsible for both export and import clearance. In the other rules, the Seller is just accountable for export clearance. What happens if a government prohibits the exportation of a product, which is highly crucial for a supply chain in the Buyer’s country? What if the Seller is not able to deliver because of the factory shutdown?
Delays and cargo shipping insurance
If the delay is because of the seller’s activity and the product is not delivered to the shipping company or has not left the warehouse or place of storage that is named in the insurance policy, the underwriter or insurance company has no obligation because the insurance contract is not effective yet. See Section 8 Duration of the Maritime Cargo Clauses.
In case the delay occurs after starting the transportation, and such delay is the proximate cause of loss, it might not be covered by the insurer based on the Exclusions section.
Delays and international transport
Many international conventions govern carriage contracts, which are usually mentioned on the Bill of Lading. We can name Hague-Visby, Hamburg, Rotterdam (for marine transport), Warsaw and Guadalajara (for air transport), CMR, and Vienna convention (for road transport), COTIF and OTIF (for rail transport).
These conventions govern the transportation relations between the Shipper, Consignee, and Carrier. Each convention indicates unique responsibilities and liabilities for delay, and in most situations, carriers assume limited liability based on the weight or quantity of packages.
The important point that many companies neglect, is that the carriers’ liability is limited and not always equal to the actual value of the product in most situations.
There are too many articles in different conventions about delay and its consequences. This issue should be investigated based on the nature of the consignment, the governing convention, and the specific agreement of transportation. For example, in article 5.7, 6.1.b and 19.5 of Hamburg convention, it is mentioned:
5.7. Where fault or neglect on the part of the carrier, his servants or agents combines with another cause to produce loss, damage or delay in delivery the carrier is liable only to the extent that the loss, damage or delay in delivery is attributable to such fault or neglect, provided that the carrier proves the amount of the loss, damage or delay in delivery not attributable thereto.
6.1.b The limit of liability of the carriers for the delay in delivery, according to the provisions of article 5, is limited to an amount equivalent to two and a half times the freight payable for the goods delayed, but not exceeding the total freight payable under the contract of carriage of goods by sea.
19.5 No compensation shall be payable for loss resulting from delay in delivery unless a notice has been given in writing to the carrier within 60 consecutive days after the day when the goods were handed over to the consignee.
In some situations, like bulk cargoes and charter contracts, the delay may occur due to quarantine regulations at departure and destination. This issue may cause demurrage charges in charter contracts when the carrier has properly issued the NOR (Notice of Readiness), and the port authorities may not allow berthing.
In case the laytime is over a certain period, the importer may be liable for demurrage and any related charges. The details of the demurrage and dispatch (DEM/DES) article of the charter contract are essential for analyzing this issue. We should also pay attention to the 4W acronyms in the DEM/DES article (WIPON, WIBON, WIFPON, WICCON).
Delays and international payment
Based on Incoterms 2020, the first primary obligation of the buyer is the payment of the price as provided in the contract of sale. Considering the current situation, delay in payment may happen because of problems on the Buyers’ end, banks working days, country of origin or limitations in governmental departments.
The payment terms article in the sales agreement and Force Majeure should be accurately analysed and investigated.
Delay and customs clearance
Governments and customs administrations may take special measures for health and sanitary controls at the border. This issue may be more affected by the country of origin and departure. On the one hand, the controls may decrease to make the delivery process faster for some necessary products, such as food and produce. On the other hand, some products may get stuck at the border for customs care for necessary products. Therefore, warehousing charges in border/port holding facilities and freight surcharges may increase.
Customs administrations and other government departments may start to request health or quarantine certificates for the products that has never previously required this type of documentation. In some bulk cargoes, fumigation, health, sanitary, and phytosanitary certificates may be added to necessary shipment documents.
Resources and advisors who can help
We are experiencing a Force Majeure and emergency for all players in the supply chain, especially for exporters and importers. The first and most applicable solution is mutual understanding of exact and on-time coordination of shipping and delivery.
Understandably, companies try to make a profit for their owners and shareholders while respecting the interests of society, employees, suppliers, and customers.
For a while, the goal of business owners should change from singularly making a profit to broader social purposes such as survival.
And higher levels of mutual understanding should be established between importers and exporters to avoid disputes. More prominent companies are expected to protect their suppliers and customers as much as possible.
We interact based on the good faith principle, but business owners should be prepared for disputes. Consultation and cooperation with professional teams in the following areas help to mitigate the effect of this specific situation:
Government trade agencies
These experts can provide insight and advice on the ever-changing landscape regarding any country restrictions/bans.
In house legal, trade, and finance compliance team
This team is responsible for taking protective measures and foreseeing probable issues in the company’s supply chain.
Consult with your insurer and check for all the solutions they may offer you. It’s not just about cargo transportation insurance.
Transport and shipping companies
Transport companies do not necessarily have control over the process. Most of them are a type of intermediary. Study your contracts carefully and consult with your shipping company for the right time, route, and shipping details such as stuffing, packaging, and documentation.
Banks and Financial institutions
Consult with your bank’s experts. When we encounter discrepancy in a documentary credit, the applicant (Buyer) and banks may treat it on an approval or collection basis. In some situations, there are national restricting rules by central banks or other government departments in which the buyer is not permitted to approve the discrepancy. In other words, the buyer may decide to accept delays or other discrepancies, but the governmental organizations do not respect such a decision.
Get a customs broker to help with customs clearance process
The final and most important governmental physical controls on the product happens during the customs clearance process. Companies should hire professional, experienced, and knowledgeable customs brokers.
The first contact with the customs broker should be before finalizing the order, and brokers should search and transmit the most updated information to their customers. This information includes rules and regulations about prohibitions, quotas, documents, HS codes, valuation, and in one phrase, comprehensive trade compliance.
Customs brokers are expected to act proactively and inform traders about the most recent decisions of governmental departments. As a customer, companies deserve to have dedicated teams to support their business and products which are responsive to the unique needs and questions whenever required.
24/7 service is crucial because of time differences between countries and customer service expectations.
Most companies love win-win cooperation, but we might not win too much in the current situation. Survive-survive is a more reasonable and logical strategy for some businesses these days. Those companies who like to gain more by employing the Win-lose strategy will be accused by society for neglecting social and corporate responsibilities. It’s not a good time to pursue profit over social well-being.
It is a good time to position your company as a pioneer in respecting human values.