COVID-19-driven labor shortages and an uptick in container imports have resulted in extreme congestion at West Coast ports, sometimes resulting in delays throughout the supply chain. The parties affected by port congestion, however, care less about why and more about who is responsible for the costs associated with these delays. The question has naturally become: who pays?
There are at least two ways to determine who is responsible for these costs.
First, the parties’ governing contract may set forth general shipping terms. If, for example, the terms are DAP (delivered at place), then the supplier is likely obligated to pay for port congestion delays. If, on the other hand, the terms are FOB (free on board), the buyer will likely foot the bill. The analysis does not necessarily end here. There could be additional language in the contract’s terms and conditions that shift liability to the supplier, regardless of shipping terms. For example, if the terms and conditions state that the “supplier is responsible for 100% on-time delivery and will be liable to the buyer for any costs incurred by the buyer for the supplier’s failure to deliver as such,” then the supplier may be on the hook for these costs when it otherwise would not have been.
Another important consideration is that if normal shipping routes become consistently bogged down with port congestion issues, suppliers may be required to ship via an alternate route in order to ensure timely delivery. If there is a cost-shifting clause, like the one noted above, or if shipping terms are DAP, the supplier may be required to pay increased shipping costs associated with that alternate route.
Second, you or your supplier may have declared a force majeure event due to port congestion or its underlying cause(s), and this calls for a different analysis. A careful review of the governing contract and any force majeure notice you might receive will be necessary. The event may very well be covered as a “circumstance beyond either parties’ reasonable control,” which is a typical “catch-all” clause contained in many force majeure provisions. In this case, the clause itself may contain a mechanism for assigning or apportioning costs associated with force majeure-related impacts to freight delivery. If the force majeure clause lacks this kind of detail, the governing terms and conditions may include a premium freight provision, assigning liability for payment of expedited freight while requiring on-time deliveries. No force majeure clause at all? You are not completely out of luck. See our prior blog post here.
In the absence of these cost-assigning provisions, note that a supplier has a duty – even during a force majeure event – to take reasonable measures to perform. So, if there are other products available that can replace those stuck in congested ports, it is possible that a supplier may have to pay to expedite those replacements to its customer, as long as the cost of doing so is not well beyond the contemplation of the parties.
In any event, if your supplier declares force majeure because of port congestion or another cause outside the parties’ control, it may impact your supply to your customer, and you may need to likewise declare a force majeure event of your own. Again, closely review your contract to determine whether a declaration is possible, assess what your obligations might be if you do declare and evaluate whether a declaration is necessary. It may not be necessary if, for example, you have sufficient safety stock to get through your suppliers’ force majeure event or if you can pull product from an alternative source.
The lingering impact of COVID-19 on the supply chain has made many things abundantly clear, this included: you should have a robust force majeure clause in your contract if you do not already. If you do have one, closely review it again to ensure you are protected. Attorneys in Warner’s Automotive Industry Group can help you with this. If you have questions or concerns related to contracts or other supply chain issues, please contact Laura You or your Warner Automotive Industry Group attorney.