US-China Trade Dispute Escalation Could Increase Supply Chain Disputes

2019-08-02

US-China Trade Dispute Escalation Could Increase Supply Chain Disputes

No one can know what lies ahead for US-China trade. But in the here and now, increased tariffs can give rise to a variety of disputes on the waterfront.

Reports are growing of sellers refusing to release cargo unless additional amounts are paid, and of buyers refusing to pay for or take delivery of cargo at US ports as a consequence of increased pass through costs. This, in turn, leads to accrual of detention and demurrage charges along the supply chain. Unilateral steps, taken without careful review of contracts and competent legal advice, could lead to costly, multiparty litigation.

International transportation is highly complex with a large number of service providers filling distinct roles pursuant to different contracts among different parties and under different legal regimes. Contracts with can be impacted by refusal to release or accept cargo can include:

The sale-purchase agreement;
Bill(s) of lading for the shipment which in simple form can consist of a single VOCC through bill of landing, an NVOCC “house” bill of lading and VOCC “master” bill of lading, and in more complex arrangements such as a series of NVOCC house bill of lading or a series of sequential bills of lading. Each of these bills of lading will have its own parties and terms and conditions, and each will also attempt to bind involved non-parties to their terms and conditions as well;
Terminal services and stevedoring agreements;
Marine Terminal Operator (MTO) tariffs;
Intermodal equipment exchange agreements providing for short term use of containers and chassis; and
Insurance contracts affecting all of the above.

Against this backdrop, consider a scenario where a seller demands an increased price due to spiking tariffs, and the buyer refuses to pay. The sale-purchase contract should decide who is right, but problems do not end there, because in the meantime the cargo remains unclaimed at the terminal, warehouse or yard.

While this dispute plays out, detention and demurrage charges can accrue, often at a rate if USD 80-100 day per container. These charges can be passed up the chain from the terminal, warehouse or yard, through the ocean carrier and intermediaries, and ultimately presented to cargo interests. Many contracts include indemnity and attorney fee clauses as well. Particularly of the cargo is not high value, demurrage charges can soon exceed the value of the cargo itself which can create a whole new set of issues. Meanwhile, smaller entities involved in the contract chain may vanish, leaving larger “deep pocket” entities with legal rights but no enforceable remedy.

Some might argue that spiking tariffs, and resulting cost increases, could be considered a “force majeure”. In the USA law of contract, a “force majeure” (literally, a greater force) can, in certain circumstances, excuse a party from performance. However, there is no universal understanding or agreement as to what those circumstances may be. Rather, “force majeure” will be determined and defined by the terms of the parties’ agreement.

Price increases, even if caused by forces beyond the control of the parties, are not typically considered force majeure events or defined as such in contract clauses. However, it is possible for a contract to so provide, and in certain industries (notably construction) this is a growing practice.

Similarly, bills of lading, terminal services agreements, MTO tariffs and other form contracts are not typically drafted to let customers off the hook for detention and demurrage obligations. However, as in any situation where a party seeks to avoid its contract obligations, careful review of all relevant contract documents is advisable before a final decision is made.

Even of a party believes that it has a strong basis to refuse to release or pay for cargo, the risk of runaway detention charges should be taken into account. Parties facing such a dispute are well-advised to find a way cut off accruing charges so as to limit the scope of their dispute.