Global supply chains are again hitting the headlines

Attacks on international shipping in the Red Sea by Iranian backed Houthi armed militias based in Yemen continue to escalate. Shipping is being attacked indiscriminately via ballistic and cruise missiles and attacks by drones resulting in widely reported responsive military action being taken by the US and UK Governments, amongst others. The US has recently advised all vessels to avoid the Red Sea for the next few days (advice now supported unequivocally by industry bodies such as BIMCO)

90% of the world’s trade is carried by sea. The Red Sea provides access to the Suez Canal through which 12% of all goods traded globally passes. It is a critical link facilitating trade between East and West. That is particularly the case with container trade with 30% of container shipping transiting the Suez canal.

Unsurprisingly in light of the recent attacks, most large shipping companies have re-routed vessels via the Cape of Good Hope. This extends shipping times significantly adding at least two weeks to shipping schedules, causing knock on disruption at ports (as vessels either turn back from their original destination or are otherwise re-routed), adding significant transit and insurance costs (in addition to an expanded higher risk area attracting significant additional insurance premium).

Whilst the canal itself remains open the containers passing through the canal have more than halved (approximately 500,000 per day in November 2023 to 200,000 per day in December 2023).

These global events can sometimes feel quite removed. However, the economic implications of this disruption are significant and will be felt beyond the immediate area and the large shipping companies and contributes to already significant inflationary pressures facing businesses in the UK.

What impact is the situation in the Red Sea having on supply chains?

Oil prices are rising as a direct result of the latest issues which will be felt locally and container prices have also increased significantly which habitually are passed back to the customer. The disruption to supply chains is significant. It has been reported that major companies such as Volvo  have been required to pause production as a result of the disruption and delays to parts whilst smaller companies and those with seasonal product reliant on the just in time supply modal have expressed frustration at struggling to meet existing contracts with customers and end users. Manufacturers and exporters will need to adjust schedules. Air freight costs have also increased significantly in response to recent demand.

Unfortunately for the wider economy the impact of the latest attacks on global supply chains are coupled with issues elsewhere at the other main pinch points. Passage through the Panama canal has been severely restricted due to ongoing drought. The Straigth of Hormuz which carries a fifth of the world’s global oil and gas between Oman and Iran has also been targeted. There is considerable concern that further escalation of the issues in the Red Sea will see increased issues here where 30% of global energy passes.

Whilst many owners and operators will be making very difficult decisions as to what actions need to be taken from a commercial point of view to mitigate the position in line with their legal obligations under their contractual arrangements (with war risks clauses in charterparties being considered closely in this respect), the impact on cargo owners and those end users awaiting key components or commodities at pre-arranged ports may be significant in lieu of alternative logistics arrangements.

The logistics sector is adept at dealing with these disruptive events and has been compelled to do so repeatedly over the last few years (for instance, the global pandemic, global container shortages, the Ever Given Suez grounding, the Ukraine / Russia war and so on) and pivots quickly to mitigate the position. Businesses with supply chains which have been rigorously stress tested against such so called black swan events will be best placed to weather the current disruption. With international trade increasingly being targeted as a pressure point by malevolent global players such issues may in the short term become more regular and accordingly increased time spent on advance risk management is well spent.

What can UK businesses do to protect themselves from the conflict in the Red Sea?

Cargo interests and UK businesses should carefully review contracts to determine potential liabilities, including reviewing insurance arrangements, and ensure good lines of communication with counterparties. These ongoing supply chain pressures and continuing global uncertainty presents significant challenges to forward planning. It will inevitably contribute to further re-evaluation of inventory and stock management strategies to mitigate the worst effects of the present and immediate future disruption. It is possible this will continue to contribute to the overall demand for more locally based storage and warehousing solutions.

We often field enquiries in these circumstances as to whether force majeure clauses can be invoked or whether a contract with a counterparty has been frustrated. In short, force majeure clauses in a contract may potentially entitle one party to cancel, be excused from or extend or delay performance following a defined event which impacts the ability of that party to perform their obligations and which is outside of their control. However, the clause must expressly provide for the relevant event. If it is not referenced expressly in the contract the clause, as a matter of English law, cannot be relied on. A contract can be subject to frustration where a supervening event occurs which is outside of the control of the parties and which consequently means the parties contractual obligations are impossible to perform. However, mere delay or commercial inconvenience does not ordinarily amount to frustration.

The firm is currently acting for a number of businesses who are impacted by the current disruption. Whilst disputes will inevitably arise in these circumstances (for instance based on premature termination of contractual arrangements or parties seeking to claim damages for losses arising from delay or failure to complete orders) early, proactive steps taken in accordance with a commercial approach and good working knowledge of contractual obligations can often mitigate circumstances which might otherwise lead to a more significant dispute.