“You don’t want to be complacent. You always want to be ahead of the curve.” Dr. Anthony Fauci, M.D., Director of National Institute of Allergy and Infectious Diseases.
The coronavirus (also known as COVID-19) has now been documented in more than 100 countries and territories. As the coronavirus outbreak continues to wreak havoc on markets and industries in the U.S. and around the world, businesses are now confronting significant and unique challenges. Successful navigation of these challenges will require thoughtful and comprehensive planning. Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources (see Foley’s Coronavirus Resource Center) and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries, including automotive, manufacturing, technology, solar, hospitality and travel, healthcare, food, fashion and apparel, and sports & entertainment.
Some Plants Are Coming Back Online, With Customers Demanding Expedited Freight.
Wuhan, a city of 11 million which has been the epicenter of the coronavirus outbreak, has been subject to a quarantine since late January, resulting in the temporary (but extended) closure of all or nearly all automotive plants located there. Additionally, on January 23, China’s key export and manufacturing base of Zhejiang province declared a grade one emergency in response to the coronavirus outbreak. As a result of such quarantines, several carmakers, including Ford and GM, were forced to suspend operations across China. Recently, however, President Xi Jinping visited Wuhan for the first time since the outbreak. Following his visit, officials instructed certain vital industries in Wuhan that they could resume work on Wednesday, March 11. Carmakers have also been slowly reopening their shuttered assembly plants. Beginning on February 15, GM began to reopen its 15 assembly plants across China over a two-week period. So far, about three-quarters of China’s municipalities, regions and provinces have reportedly lowered their emergency response level from the highest tier. As more areas in affected regions are relieved from quarantines, and suppliers and manufacturers throughout the supply chain resume some level of operations (albeit at reduced capacities), the issue of expedited freight has emerged as a new potential cost and risk factor for suppliers.
As officials soften lockdown restrictions and suppliers and carmakers resume operations, even in a limited capacity, demands by customers that their suppliers pay expedited freight costs are on the rise. According to an American Shipper report, air freight rates have increased to $6.65 per kilogram ($3 per pound) from $3.65 per kilogram ($1.65 per pound) in the past month.1 The question for suppliers is who pays for expedited freight – the customer who wants parts expedited, or the supplier?
If faced with this situation, companies on either side of the issue should consider the following:
- Review Purchase and Supply Contracts to Analyze Applicable Provisions. Most automotive supply contracts include provisions which obligate either the customer or the supplier to pay freight. And, most automotive supply contracts do not expressly address the disruption and delay presented by the coronavirus. Whether a supplier must accede to a customer’s demand that it pay expedited freight charges will be determined by the contract language in a given case. Sometimes, a force majeure provision in a contract will provide some relief for the supplier.
- Absent Written Agreement, the Party That Pays Will Likely Not Recover It From The Other Side. If a supplier accedes to a customer demand that it pay expedited freight conditioned on an agreement to later revisit a refund of what is paid, then that agreement should be documented and signed by both parties. Otherwise, once the money is paid out, it likely will not be recovered.
- Review Allocations. Manufacturers should review allocation requirements and obligations to multiple, competing customers for potentially scarce materials as manufacturing operations ramp back up.
In summary, it is important for suppliers to carefully review their supply agreements and the surrounding facts in order to determine their rights and obligations with respect to expedited freight. Foley will continue to keep you apprised of relevant developments. Click here for Foley’s Coronavirus Resource Center for insights and resources to support your business during this challenging time.
