Risk management in the era of Covid-19

The world is currently dominated by concerns around COVID-19, the effects of which will continue to be felt for some time. From a risk management perspective, the logistics and supply chain sectors must consider the impact of COVID-19 on their current and future business operations

In the event that disruptions caused by Covid-19 make it difficult for participants in the logistics and supply chain sectors to meet their obligations, will Covid-19 constitute a “force majeure” event under South African law?

A force majeure is an act of God, or man, that is unforeseeable and out of the reasonable control of one or both of the parties to a contract, and which makes it objectively impossible for one or both of the parties to perform their obligations under the contract.

These specific circumstances and criteria need to be met for force majeure to be relied on to suspend obligations under a contract. Relying on force majeure to suspend or cancel a contract, but failing to meet these criteria, could result in specific performance or damages claims being brought against that party.

Participants have already been affected by Covid-19 with cancellation of sales contracts, supply chain and shipping contracts and/or the late delivery of cargo. In many instances, the loss will lie where it falls.

In most cases, parties to these contracts will not have claims against one another for non- or late delivery – either because their contracts contain appropriately worded force majeure clauses, or because their losses are purely consequential and not recoverable under the contract.

Insurance

Insurance is a risk management tool often relied upon in these circumstances. Participants have to look to their insurance policies to ascertain whether or not the loss is covered. Whether a claim properly lies under a policy will depend on the circumstances and the wording of that policy.

Generally speaking, however, the claims will not lie under a typical marine insurance goods policy concluded on Institute Cargo Clause (A) or similar terms. Participants may also look to their liability or business interruption policies.

The analysis of these policies is beyond the scope of this article. Save to say that there is no general rule that exists as to whether or not cover lies under those policies; each case will have to be determined on its merits.

Future

Participants in the logistics and supply chain sectors need to assess their risk by reviewing contractual arrangements, and by ensuring that their force majeure clauses are appropriately worded in future contracts.

Losses arising out of a pandemic often far exceed the value of the cargo concerned, are unknown at the time of negotiating the insurance policy, and are, in effect, uninsurable in the insurance market.

The best risk management tool is to reconsider existing sale and supply chain contracts and mitigate these risks. If the contract does not offer sufficient protection, then the party must either cancel the contract (if at all possible) or accept a potentially uninsurable risk.