Supply chain networks and Brexit
Doom and gloom or logistics boon?
Deal or No Deal
As the political manoeuvring and counter-manoeuvring continues, it becomes increasingly difficult to predict the result of Brexit. A deal has been presented and rejected by parliament. Theresa May continues to negotiate with European leaders who say that they will negotiate no further. 29 March 2019 has passed and a new deadline of 31 October 2019 has been agreed - although it is still no clearer whether the UK will leave with or without a deal.
Clearly, any increased border controls throw up the possibility of increased delays to the supply chain. Such delays may be considerable if, as is predicted, this could result in even a couple of minutes’ additional clearance time for the tens of thousands of trucks passing through our major ports each day.
The logistics industry tends to be a reasonably innovative, adaptable and imaginative industry which is not new to such procedural obstacles. A few years ago, the IMO introduced a requirement that shippers of goods in containers had to provide a “verified gross mass” (or, as the logistics industry loves its three letter acronyms, “VGM”) for each container carried on a ship. The industry complained that this would delay shipments and that congestion within ports would be unmanageable.
But the industry adapted very quickly to deal with this - and in many ways, similar adaptations may be useful to address increased customs checks. The weight of containers can be assessed by Authorised Economic Operators (AEOs, of course …). The information is then provided electronically to the vessel owner. The AEO Scheme is regulated, licenced and policed in order to provide VGMs but the primary purpose of this authorisation is to provide bonded customs services.
Electronic customs clearance gateways are used for customs registration and clearance of goods before the goods move. By the time the goods reach the border control point, the electronic “paperwork” should already have been completed. Indeed the latest government advice on dealing with trade in the event of a no-deal outcome (Moving goods to and from the EU through roll on roll off ports or the Channel Tunnel) concentrates on the electronic registration which has to occur prior to the goods arriving at the port.
Perhaps there will be increased checks to ensure that goods match the customs entries. But some border checks exist now, whether the goods have come from the EU or otherwise.
Extra border staff may be needed due to an increase in the processing required outside a Customs Union but it is not clear that this will equate to long terms delays at the border. It would appear from the latest government advice that the intention is to apply something of a soft touch to this during the initial stages.
That having been said, it is likely that there will be some teething problems. It is almost inevitable that when new procedural requirements are put in place, it will take time for the processes to bed in and for the users of those processes to adapt. Although many of the problems can be overcome with technology, that does depend on the investment and proper use of that technology - and we are relying on government departments either side of the Channel to invest the time, money and personnel! Of course, if there is a hard Brexit or no deal, there is a risk that the checks will substantially increase and that some officials carrying out border checks may exercise a little more enthusiasm than has otherwise been the case.
However, such delays are nothing new to the logistics and supply chain industry. A trip along the A2 between Dover and Folkestone will show that operation stack is an old friend of that industry. Almost every summer (and certainly predating the referendum) the Port of Dover and the Channel Tunnel have to contend with delays and disruption. It may be strikes in the Port of Calais, bad weather, immigration and migrant crises, but delays have been encountered before.
What is different about the initial delays that may occur in the aftermath of 29 March? Well, any such delays can be predicted and the consequences can, to a degree, be managed.
Legal implications of delays
If we can predict delays on 29 March, we can plan for them. Those involved in the logistics industries should, at this stage, consider whether they address some of these issues in both their contractual and insurance arrangements.
Many “just in time” logistics arrangements will be difficult to maintain whilst the parties figure out the initial impact at the borders. The fresh food and motor industries frequently rely on imports from or to the EU in order to keep their production lines running - they do not carry large stocks. Their logistics contractual arrangements are predicated on the assumption that current logistics times can be maintained. Forwarders may be working on the assumption that they can simply avoid liability for delays on the basis that they are outside their control. However, a defence based on Article 17.2 of the CMR relies upon the carrier exercising the utmost of care. If the delays are predictable, yet the forwarder doesn’t adapt its logistics network to address the anticipated delays, it may be very difficult to avoid the liability for delay within Article 17.1.
Similarly, with many Force Majeure clauses within logistics agreements, they require both the event and the consequences to be outside the control of the parties before performance is excused. If we can already predict delays, then there will be some interesting arguments as to whether such delays fall outside the control of the parties. Moreover, such clauses often concentrate on the impact of the delays on performance without relieving liability for individual losses and delays.
Many insurance policies seek to exclude delay or the consequences of delay (and the Institute Cargo Clauses (A) provide a very clear example of this at clause 4.5). Both cargo owners and forwarders need to review their respective insurance arrangements to ensure that they are adequately protected.
Delays also give rise to other potential knock-on problems - static commercial vehicles outside major ports are very vulnerable to attack by thieves or by migrants attempting to get into the UK.
Access to trailers by thieves or migrants gives rise to the cargo within being lost, destroyed or possibly seized. Again, this raises some interesting causation questions under cargo policies where the access to the trailer occurs due to delays at the customs border. The risk is clear so a review of the insurance arrangements should be made at this stage. Furthermore, where those delays (and thus the vulnerability of the cargo) are caused through a failure by the cargo owner to complete the proper documentation, disputes are likely to arise unless these issues are addressed contractually before the delays occur. The delays may be caused by the cargo owner but the haulier continues to owe duties towards the cargo.
At the outset, it was suggested that there would be a degree of optimism in this article. Already, we see logistics companies assisting their clients in planning for 29 March. The most obvious example is the storage of product to overcome the anticipated delays at the borders. Not every product can be stock piled (fresh fruit and vegetables being an obvious example). However, a degree of supply chain planning for time sensitive stock can be undertaken and storage opportunities offered.
Furthermore, technology offers very obvious advantages for such a situation. Electronic filing and processing of customs documents is almost certainly the answer to many of the potential administrative issues presented by Brexit. Given the quantity of trade passing between the EU and the UK, it is in the interests of both the UK and the EU to get the trade moving quickly and efficiently. Although some teething problems may be experienced initially, the forwarding and logistics industry has shown itself to be remarkably adaptable in terms of using existing and new technologies to work with both industry and government authorities in allowing trade to move smoothly. The government advice on this issue anticipates many traders using the experience and technology available to freight forwarders and customs agents.
There may also be opportunities for the insurance industry to offer products which assist where there are anticipated delays at borders.
Traditionally, this has been something which insurers have sought to exclude as a risk. However, where the supply chain industry has a clear concern, perhaps the opportunities for insurers should not be overlooked.
At the moment, the UK is due to leave the EU by 31 October 2019 (although the government has put forward a target exit date as 1 June 2019). Quite what any exit will look like, remains to be seen. It is almost inevitable that there will be a degree of disruption as the border controls adjust and adapt. The uncertainty of the terms of the departure clearly do not assist in planning.
However, the logistics and supply chain industry is a remarkably adaptable one. It has dealt with increased customs and other regulation previously and even managed to turn this to profit. There are some risks arising from increased delays but, perhaps unusually for delays in logistics, they are predictable. That being the case, Brexit offers a number of opportunities to both the logistics and insurance markets and it would appear to be the ideal time to grasp those opportunities.
If you wish to discuss any of the issues raised in this article or require further information on the issues raised, please contact Christopher Chatfield.