As I write this, the world’s attention is on the financial markets and the impact of US tariffs on Chinese imports. However, those of us advising ship owners and traders are scrambling to help them deal with the legal issues arising from the disruption to supply chains that cover US$500 billion worth of Chinese imports to the US each year.
There is a hiatus in the sense that goods “on the water” before the tariffs were announced are not covered by the new tariffs (which now stand at 145% in terms of goods entering the US – and that number will probably have gone up or perhaps down by the time anyone reads this). The problem however is – what happens to those goods currently sitting in Chinese ports and destined for shipment to the US? What about the “just in time” supply systems and long-term purchase agreements between Chinese suppliers and US buyers that have hitherto enabled a seamless flow of goods from PRC factories to warehouses and PRC ports and on to container ships which operate on scheduled services to bring those goods to the US?
It’s perhaps easier to ask this question than it is to answer it but already we are seeing paralysis and paralysis usually leads to two things. Firstly, there is the question of who pays. Who is legally liable for the delays that result from paralysis? Secondly, there’s the question of how, if necessary, a client can get out of what has, due to no fault of their own, suddenly become an unprofitable contract?
As regards the first question, I’m reminded of an article that I wrote some years back – which goes to show that shipping is never predictable. That article was entitled “Expecting the unexpected” and it covered the concept of “force majeure” as a means of dealing with contracts that have become impossible, illegal or radically different from what was contemplated. Those interested can review the article by clicking here. Unfortunately, force majeure clauses will rarely shield a party from liability for delay which in the world of shipping is known as “demurrage”. Demurrage is effectively liquidated damages for delay i.e. a cash sum paid per day if something is not done within a defined timeframe. Save for limited exceptions, which must be stated in the contract, it’s designed to cover all delays even those that arise due to circumstances beyond the control of a charterer or anyone using a Terminal or storage facility. A force majeure clause will generally not cover demurrage unless the force majeure event was entirely fortuitous and prevented performance rather than making it more onerous or expensive.
The other concept that may assist under English law is “frustration” which is an English common law doctrine. That means there does not need to be any reference in the contract to frustration. The doctrine is applicable to all English law contracts. Frustration is similar to force majeure in the sense that one needs to prove that the obligations under the contract have become radically different to the obligations contemplated when the contract was signed. The same problems therefore arise as in situations where there is a force majeure clause in the contract.
Absent any legal remedies excusing performance, the present situation may simply result in parties deciding to walk away from contractual obligations. To put that in legal terms, parties may decide that they have no option but to repudiate the contract and/or formally terminate and deal with the consequences. That opens up all sorts of legal issues ranging from how the party suffering the loss can obtain security for its claim, how it can prosecute its claim, how to quantify the claim given the duty on the party who sustains the loss to mitigate, how to obtain a judgment or Award and how to enforce that judgment or award against a company which may well be in the United States. It seems likely therefore that there will be a considerable increase in claims if this tariff policy persists and the supply chain from China to the US remains disrupted.
Anyway, time will tell as by the time you read this the China tariffs may have also been delayed or postponed. Pending that, we are preparing ourselves for an increase in disputes under shipping and trade contracts most of which are governed by English law.
Nick Burgess
Partner
