The backlog and road transport disruptions are having a particularly severe impact on the movement of reefers – ©123RF.com
Key issues with coronavirus and the legal implications for our supply chains – By Chris Dann and Chantal Stewart
As the Covid-19 coronavirus continues its global expansion, the economic impact from the disruption to the supply chain is being keenly felt.
In this article we outline some of the key issues and the legal implications for importers, exporters, forwarders and carriers. We focus on China, as the epicentre of the epidemic and worst-affected country, as well as a key trading partner – more than a quarter of New Zealand’s dairy, about half of all meat, and almost two-thirds of wood exports went to China in January.
However, the issues affecting our trade with China are likely to be repeated in other markets and worsen as the virus spreads. Figures issued by Stats NZ indicate that the virus may have cost as much as NZ$300 million in lost exports to China in the past month alone.
The US-based global research and advisory firm Gartner warns “the coronavirus has already eclipsed SARS” in terms of supply chain interruptions. The 2002 SARS (severe acute respiratory syndrome) epidemic led to 8000 cases. At that time, the GDP of China represented a little over 4% of the world GDP. By contrast, the number of detected cases of Covid-19 has already passed 80,000 and today China represents about 16% of the world GDP.
Domestic impacts and issuesWhile many New Zealand businesses are focused on getting goods from their suppliers to their customers at minimum extra cost and disruption, it is important to also remember duties as an employer.
Businesses must ensure, so far as is reasonably practicable, the health and safety of workers and others who might be affected by the work carried out by the business. This requires businesses to take appropriate steps to eliminate or otherwise minimise health and safety risks in the workplace, including health-related risks like that posed by infectious diseases.
There are several precautionary steps that businesses can take to minimise the risk of spreading infectious diseases – guidance is available from the Ministry of Health (MOH) and Employment New Zealand.
Employers should also regularly check their travel policies (particularly around international travel), review Ministry of Foreign Affairs and Trade (MFAT) travel advisory updates, and (crucially) avoid discriminatory action by treating anyone (employee or customer) differently due to their nationality or religion.
Our own Anthony Harper health and safety, employment and immigration experts have published a number of articles, and the Ministry of Business, Innovation and Employment (MBIE) has published information, guidance and support related to Covid-19 from several government sources, including information for small businesses and the latest on the NZ Customs Service’s entry procedures for New Zealand.
In Australia some ports have introduced measures including delaying pilotage services until the 14-day quarantine period has been observed
Inbound freightThe MOH recently announced that the master of commercial vessels must confirm everyone is healthy or advise if anyone is unwell, 12 to 24 hours before the vessel’s estimated time of arrival in a New Zealand port. If someone onboard the ship is symptomatic, the vessel would not receive pratique (health clearance) in advance.
We understand that the general travel and quarantine restrictions in place for (air) passengers don’t apply to crew onboard commercial vessels. That could change – we have seen cruise vessels delayed, and in Australia some ports have introduced measures including delaying pilotage services until the 14-day quarantine period has been observed.
The situation on the ground in ChinaNew Zealand Trade and Enterprise (NZTE) has set up an excellent page on their website gathering the latest updates from NZTE, the Ministry for Primary Industries (MPI), MFAT and Customs. The latest information available (as at 9 March) is as follows.
Ports (sea and air) are open, but there are operational delays affecting imports in and exports out of China due to ongoing staff shortages. There is also a backlog after the extended Chinese New Year holidays.
Trucking is severely disrupted due to driver shortages and restrictions on both vehicle movements (the highways in some parts of China are closed) and labour movements (many drivers are unable to return to work due to strict controls in various provinces and requirements to self-isolate for 14 days before resuming work). Where transport is available (some suggesting it is at 15% capacity), the cost has increased up to 150%.
There is significant disruption to air freight because of the reductions and cancellations in flights to and from China. Inevitably, some airlines have announced that increased rates may apply as demand is up and capacity down.
Shipping lines are beginning to announce the blanking (cancellation) of some sailings due to the lack of freight.
On the positive side, there are no changes to the regulatory settings for trade with China. No additional sanitary or phytosanitary requirements have been imposed due to Covid-19 and MPI says officials in China have confirmed that there are no changes to their customs and import clearance procedures.
Refrigerated containers – a particular problemThe backlog and road transport disruptions are having a particularly severe impact on the movement of refrigerated containers (reefers) because ports only have a finite number of reefer plug-in points and low availability of cold storage facilities. The ports of Shanghai, Tianjin and Xingang are worst affected, and reefers awaiting pickup are being temporarily stored and plugged in onboard a vessel docked alongside.
Accordingly, reefers in transit to China may be re-routed for transhipment, discharged at alternative ports or returned to port of origin – in each case possibly without notice. Ocean Network Express (ONE) has already warned of discharge at other ports. Diversions mean extra freight costs, as well as potential demurrage and box detention charges.
Additionally, shipping companies are beginning to introduce a congestion tax for reefer transport to China of between US$1000 and US$1250 per box. Accepting these increased costs may be a better outcome than having your cargo abandoned or spoiling because the container cannot be plugged in.
We have heard stories of chilled fruit imported from New Zealand being abandoned on the wharf in a Chinese port, so the risks are real and not just theoretical.
The congestion of full containers at ports will also result in a reduction or delay in the supply of returned empty boxes to be filled for the next shipment, thereby further impacting the supply chain.
We recommend checking NZTE’s website for updates and talking to your forwarder, and for forwarders to keep abreast of the latest shipping line press releases and keep their customers informed of costs and workaround options.
What are my legal rights?A shipper typically has very few rights, while a forwarder and carrier has a number of options, in these circumstances.
The first point to bear in mind is that, unless a freight forwarder has accepted liability as principal (by issuing a house bill of lading or waybill, for instance), a forwarder is merely the agent for the shipper in arranging a contract of carriage between the shipper and the carrier. A forwarder undertaking traditional forwarding services has no liability for loss or damage to goods or the cost of carriage.
In any event, standard freight forwarding terms and conditions and bill of lading terms include rights for the carrier/forwarder to depart from customer instructions, or carry the goods to the contracted port of discharge or place of delivery by an alternative route to that indicated in the bill of lading/other shipping documents (and charge additional freight accordingly).
If the carrier/forwarder considers that continued carriage will incur additional expense or risk or be affected by any hindrance, risk, delay, difficulty or disadvantage, they may abandon the cargo at any place or port (with the customer remaining liable for the full freight costs as if the carriage had been completed as contracted, plus any additional costs from abandonment), or incur any additional expense to continue the carriage (at the customer’s cost) or suspend the carriage and store the goods at any place at the customer’s cost.
If the cargo is perishable or is not collected by the customer following suspension or abandonment, they may sell or dispose of the goods at the cost of the customer, and exercise a lien over the goods and related shipping documents for all amounts due.
Who bears the risks and extra costs?
Where the risks and costs referred to above ultimately fall depends on the terms of any relevant supply contract. Often, that question is determined by the relevant Incoterm.
Incoterms (as we described in the Feb/Mar’20 edition of FTD) outline the responsibilities of sellers and buyers for the delivery of goods under sale contracts, including the point of delivery/passage of risk and which party is responsible for which costs. There are eleven different Incoterms and each one differs in the extent to which it is either seller or buyer favourable.
Insurance is also likely relevant here, depending on the scope of cover and any relevant exclusions. Businesses should contact their insurance brokers to check how any applicable marine cargo/transit insurance would respond to the exercise of any of the above rights by a carrier/forwarder.
Unfortunately, exclusions for claims relating to any epidemic may prevent recovery.
Force majeureThe outbreak of Covid-19 and the consequent supply chain disruptions would very likely constitute a ‘force majeure’ event under either applicable contract terms or (in some countries, but not New Zealand) under applicable laws (including China).
Force majeure excuses non-performance or a delay in performance caused by the relevant force majeure event, but usually only to the extent that the relevant non-performance or delay is outside the party’s control and could not reasonably be avoided. Force majeure is not a complete excuse to ‘sit on your hands’.
We understand that Chinese courts and arbitration bodies judged the SARS outbreak in 2002/3 as constituting force majeure in many cases at that time. If you can’t get your goods to your customer as a result of Covid-19, an early communication of force majeure would be prudent. On the other hand, if you receive a force majeure notice, ask questions and seek evidence that the reasons for non-delivery are genuinely related to Covid-19 and can’t be avoided – seek workarounds.
Difficult timesThese are difficult times and the issues are, in many cases, novel. Early, open and honest communication is key – with customers, suppliers, insurers, forwarders, carriers … and lawyers. For further information, please get in touch.
P.S. I write this article poolside in Honolulu, with the sweet irony of being marooned here by the closure of the borders of my Pacific Island destination (for work sadly) as a result of … coronavirus. Disruption comes where we least expect it.
Internationally recognised partner Chris Dann heads the transport and logistics team for law firm Anthony Harper; Chantal Stewart is a solicitor in the same team; the team is one of the few in New Zealand with strength and experience along all facets of the supply chain www.anthonyharper.co.nz