COVID-19 resets contract norms for project logistics

COVID-19 resets contract norms for project logistics

A BBC Chartering vessel discharging project cargo to a barge at the Port of Houston. Photo credit: Port of Houston.

Manufacturing and transport delays, travel lockdowns, port restrictions, upended carrier schedules, and other shutdown-driven snarls have upset the normal flow of project logistics transport since February, and that new COVID-19 reality is forcing the supply chain to reappraise contracting norms.   

A web of logistics service providers (LSPs) move cargo around the globe for project owners — such as oil and gas companies, petrochemical companies, or developers of energy projects — and the engineering, procurement, and construction (EPC) companies that build their projects for them. 

Owner concerns flow “from the top down,” said Utsav Mathur, a senior associate specializing in shipping, offshore energy, and global disputes with international law firm Norton Rose Fulbright. These concerns shape the contracting decisions that link owner to EPC to project forwarder, fabricator, carrier, and other LSPs. 

Project cargo contracted to move as COVID-19 raged in March and April could easily have been fixed a year or more earlier, when no one would have imagined a pandemic that would roil global shipping. However, Dennis Mottola, a project logistics consultant recently retired from a major EPC, said logistics contracts should still have anticipated the possibility of problems arising that are beyond the control of either party. “That's where you have clauses that address specifics such as excusable delays and force majeure … If you don't have specific language dealing with force majeure, well, then, good luck,” he said. “You don't have much [recourse] unless you define it.”

When it comes to cargo movement, owners will be focused on contract schedules, potential operating challenges, and risks to financing, Mathur said. The key question is: “What does the force majeure clause in the operative contract say, and how well is it tailored to handle a pandemic scenario?” he said. 

If there is no provision for force majeure — acts of God that make it impossible to perform as contracted — in a given contract, he said, “there's no doctrine under common law that gives you similar rights.” 

“You either have a force majeure clause that spells out what happens, or you are stuck dealing with complicated doctrines like impossibility of performance or frustration of contracts,” said Mathur. “[These are] not tailored to solving problems in the middle of project construction.”

A force majeure clause fitted to present realities “would contemplate the risks of a pandemic and carefully define the events that trigger application of force majeure remedies,” Mathur said. The COVID-19 pandemic has caused manufacturing delays and forced many LSPs and equipment suppliers to find alternate sourcing for critical path items for project construction, for example. 

“Certain [contractual] remedies are available,” Mathur said. These might include a moratorium that pauses all schedule requirements, treats the resulting schedule setback as an excused delay, and allocates delay expenses among the contracting parties, he said.  

John Hark, chartering director with Bertling Logistics, told JOC.com that Bertling suggests adding a “unique and special” clause that points out that any obstacles, hindrances, delays and damages caused by COVID-19 trigger the consequences of force majeure. 

The takeaway is that contracting parties need to customize their response in their contracts. “The alternative is to leave it up to common law or a generic force majeure clause that does not appropriately allocate risks and increase the likelihood of litigation,” Mathur said.   

Sound relationships critical

Good contracting practice means both parties recognize they can't control when something unexpected will arise — and that both are willing to be reasonable when it does, Mottola said. All risk cannot be identified beforehand. “It can't be one-sided, where one party is saddled with all the risk,” he said. “Documents should deal with 'what happens if,' and parties have to be reasonable with each other. The venture will be a joint failure or a joint success.”

No matter what your contact says, if you have sensible commercial parties you can often work out a deal in the face of the unexpected, Mathur said. Cargo owners may agree to things not specifically included in a force majeure clause due to the nature of the relationship between the business partners, he said. When a contract does not contemplate a specific scenario and offer a customized remedy, “that's when the commercial relationship kicks in,” he said. “[Business partners] want to preserve the business relationship.”

Significantly, both parties should invest in knowing who they are doing business with, Mottola said. “If we stub our toes, we are going to work on it together…In most cases you don't want it to be the last time that you work with this trading partner. You take a longer-term approach to problem resolution, rather than just sticking it to the other party. It shouldn’t be just 'one and done.' You could be working together for 20 or 30 years.”

Contact Janet Nodar at janet.nodar@ihsmarkit.com and follow her on Twitter: @janet_nodar