Will the Suez Canal blockage affect your contract?
As you would be aware, the Suez Canal was blocked for about six days during March due to a large container ship, the Ever Given, becoming wedged sideways across the waterway. The Ever Given has now been freed, but the consequences of the blockage are still playing out.
The Suez Canal is responsible for about 12% of global trade. It is estimated that the blockage held up about $9.6 billion of trade every day that it remained blocked. This is largely because the blockage was holding up hundreds of other ships, which took approximately a week to clear after the Ever Given was released. On top of all of that, the Ever Given itself was carrying about 18,300 containers.
As a result of the Suez Canal blockage, a significant amount of contracts will have been affected. In a previous article, we explained how COVID-19 might affect contracts, with particular focus on force majeure clauses and frustration. The blockage of the Suez Canal highlights that there are many types of unforeseen events that can impact contracts – not just COVID-19.
Passing of risk
Passing of risk is a term used to describe when the risk associated with goods transfers from the seller to the buyer. For example, does the risk transfer to the buyer when the goods are loaded onto the ship, or when they are delivered to the buyer’s warehouse door (or anywhere in between)?
If you’re entering into a contract for the sale of goods, it is really important to understand when the risk passes from seller to buyer so that you know when you are liable for the goods. This is important for things such as knowing when you need to have the goods insured. Incidentally, the Suez Canal blockage might result in a rise in insurance premiums for international sale of goods contracts.
When entering into an international contract for the sale of goods, Incoterms become relevant. Incoterms are international commercial terms that have been developed by the International Chamber of Commerce and are recognised by governments and legal authorities worldwide. Incoterms are a set of abbreviations that are used in international sale of goods contracts to clearly set out which party is responsible for the goods at which point in time.
Some examples of Incoterms include, but are not limited to:
- EXW (Ex-Works or Ex-Warehouse)
The seller is responsible for placing the goods at a designated location, at which time the risk passes to the buyer.
- FAS (Free alongside ship)
The seller is responsible for placing the goods alongside the vessel. Once the seller has done this, the risk passes to the buyer.
- DPU (Delivered at place unloaded)
The seller is responsible for unloading the goods at the designated location. This means the seller carries the risk of transporting and unloading the goods, after which the risk passes to the buyer.
- CIF (Cost, insurance and freight)
The seller is responsible for delivering the goods onto the vessel, at which point the risk passes to the buyer. However, the seller is also responsible for the costs and freight necessary to bring the goods to the designated location and the seller must also contract for insurance against the buyer’s risk.
As you can see from the above examples of Incoterms, the risk passes from the seller to the buyer at different points, depending on which abbreviation is used in the contract. The Incoterms used in the contracts affected by the blockage of the Suez Canal will determine which party was carrying the risk at the time the blockage occurred.
For example, if the FAS Incoterm was used, the buyer would have the risk because the seller only held the risk until the goods were placed alongside the vessel. Therefore, anything that happened to the goods after that time is the responsibility of the buyer.
By contrast, if the DPU Incoterm was used and the parties named the unloading destination as the buyer’s warehouse, for example, the seller would still be carrying the risk because the goods had not yet been unloaded at that destination.
Therefore, as with any contract, the party responsible for any loss incurred as a result of the Suez Canal blockage will depend on what the contract says. The issue of loss becomes particularly relevant in the case of perishable goods that got held up as a result of the blockage.
A force majeure clause allows a contract to be ‘paused’ during a force majeure event so that neither party will be in breach of the contract if they fail to fulfil their contractual obligations during that time. A force majeure event is typically an event that is outside the control of either party and prevents or significantly impacts the performance of the contract.
Some force majeure clauses will set out what types of events will trigger the clause. Such events often include things like natural disasters, war and acts of God.
Whether force majeure will apply to any of the contracts affected by the Suez Canal blockage will depend on the wording of the clause in each particular contract. However, we think it would be unlikely that this type of event would trigger a force majeure clause.
Frustration is a common law principle. Unlike force majeure clauses, frustration will render a contract void as at the point of frustration, which means neither party is obliged to perform their contractual obligations from that time.
Frustration occurs when an event beyond the control of the parties makes the contract incapable of being performed or makes performance of the contract radically different from anything contemplated by the parties when they entered into it. For frustration to apply, the event also needs to have been unforeseeable and cannot have been provided for in the contract. If a force majeure clause in the contract covers the event, frustration will not apply.
We have written about force majeure clauses and frustration in detail in our previous article: How COVID-19 can impact on contractual performance.
The owners of the Ever Given will no doubt face legal challenges on multiple fronts as a result of the incident; from the companies they were delivering goods for, the owners of the Suez Canal and the owners of the other ships for a start. The owners of the Ever Given will need to have had both appropriate contractual terms and insurance to protect their risk of trade. Trade is engaged for profit, to make profit requires risk, that risk can be minimized by appropriate legal advice and insurance.
If you have entered into a contract that has been affected by force majeure or frustration, please do not hesitate to get in contact with Lynn & Brown Lawyers for expert legal advice.
If you have entered into a contract, or are considering entering into a contract for the international sale of goods, we recommend obtaining legal advice about the implications of Incoterms and other unique contractual terms for international trade that we regularly advise on.
About the authors:
This article has been co-authored by Chelsea McNeill, Ben Bullock and Steven Brown. Chelsea is a Law Graduate from Murdoch University. Ben is a Perth Lawyer and Associate at Lynn & Brown Lawyers. He was admitted into the Supreme Court of Western Australia in July 2013, and specialises in both commercial and dispute resolution matters. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.