Risk & Compliance / Finance & Credit / Extra Mile

Force Majeure and Risk Management

Hurricane Sandy provides valuable risk management lessons for global logistics providers.

February 1, 2013
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Property damage along the New Jersey coast caused by Hurricane Sandy.
Photo Source: U.S. Coast Guard

Global supply chains face the daunting prospect of responding to events like Hurricane Sandy in the many regions where they operate. Natural and man-made disasters can result in cargo loss or damage, port, airport and road closures and the many delays and disruptions that result.

Warehouses may sustain damage or be forced to cease operations when they lose power or damaged infrastructure makes them inaccessible.

A global logistics provider must do all it can to ensure that the trade lanes remain open. At the same time, it must be mindful of the potential avalanche of cargo liability litigation. The following guide will help to minimize that liability.

Triage and Initial Response

Analyze and outline the potential for delay or damage for all shipments and inventory, including shipments en route to or scheduled to depart from the affected area. Prioritize any time-sensitive shipments. Check warehoused inventory for damage from flooding or power outages, and assess security challenges, such as lack of power or personnel shortages.

Take steps to prevent additional damage or delay, including rerouting cargo, backing up computer systems, establishing a remote headquarters, relocating inventory and hiring additional security.

As part of the response phase, contact customers as soon as possible to advise them of any delay, rerouting, or any potential effect on shipment or delivery. Assure customers that the company is taking all reasonable precautions and measures to protect cargo, but don’t admit to responsibility for any loss or delay. Provide customers with regular updates.

The Power of Overwhelming Force

Examine relevant service agreements, warehouse receipts, and transport documents for “force majeure” and similar clauses. Force majeure refers to overwhelming forces and may apply to hurricanes and other events for which the logistics provider may be incapable of preventing damage or losses.

In legal documents, force majeure clauses can provide valuable protection. Look for notice provisions, which often mandate that the shipper file legal notice within a certain time frame.

If a logistics provider invokes force majeure protection, it should notify customers, shippers and consignees, identifying the source of the force majeure event that resulted in the service failure.

Notify insurers (as well as shippers or consignees) immediately of damages and delays. Stoppage in transit may require notification to insurers, and remedial mitigation measures to be approved by insurers in some situations.

In any related notices, reference the event and the cause of the damage. Adhere to existing terms and conditions and notice provisions.

Getting Back to Business

Determine whether the cargo is still deliverable to the consignee. Once the cargo arrives, the consignee may refuse the goods based on one of several potential defenses. This can include damage to the warehouse or port, or a lack of electricity or personnel. Similarly, the consignee may have a force majeure clause in its contract, or be protected under state law.

Monitor accounts receivable following a major event for companies attempting to avoid payment of charges that are due and owing to the forwarder and/or carrier.

Other Protections

Be aware of potential defenses available under state, federal, or international law that may excuse performance. These include the Montreal Convention; the Carriage of Goods by Sea Act; the Convention on Contracts for the International Sale of Goods; and the Uniform Commercial Code.

The logistics provider’s actions, or inactions, in the weeks following an event may be the determinative factors in any subsequent cargo loss litigation. These events highlight the need for appropriate contracts, terms and conditions, and risk management protocols to anticipate potential business interruptions and to assist efforts to keep cargo moving at all times. wt

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