Houthis & The Red Sea – How Is This Affecting Supply And Manufacturing?

The supply chain is a process that converts raw materials into finished products. The process starts with a supplier, who gathers the materials to be sold onto a manufacturer, who will produce the products. Once this process is complete, the manufacturer will sell the goods to a distributor, who will distribute the goods to retailers, who in turn sell the products to consumers.

A contract will be in place between each of the parties at the different levels of the supply chain. There are usually specific time limits as to when delivery of the goods is to be made, and these are stipulated in the contract. Time may be deemed ‘of the essence’ of the contract. This means that the stated time for completion of an obligation in a contract, such as a delivery date, is a condition of the contract and will be strictly enforced. For example, if a specific date for delivery of goods is set out within the terms of an order, where time is of the essence, a failure to meet that date will put the supplier in breach of contract.

‘Force Majeure’ clause

It is not always possible for time limits to be complied with, due to unforeseen circumstances which may arise. To combat this, there is often a clause in the contract, namely a ‘Force Majeure’ clause. This covers situations where an event occurs outside of a party’s control, which means that they are unable to comply with its obligations under the contract, and so they are released from these obligations without any liability. An example may be a natural disaster or unexpected civil unrest / the outbreak of war.

There are currently attacks being carried out by Yemen’s Houthi fighters, both on Israel and on commercial ships in the Red Sea. Missiles have been fired at a British warship, along with many commercial vessels. A well-drafted force majeure clause may come to the aid of a supplier, who through no fault of their own has been impacted by delays in the Red Sea.

Alongside the issue that many contracts between suppliers and manufacturers will not be fulfilled, or will be a severe delay in fulfilment, these attacks have caused various concerns about the effects on the supply chain. Concerns are growing about the global economic impact of the disruption to shipping through the vital Red Sea. The Red Sea is one of the main trade routes between Asia, the Middle East, and Europe, and it is estimated that 10% of world trade by volume utilises this route. An arm of the Red Sea, the Suez Canal, sees around 12% of global shipping traffic go through, being the shortest route between Europe and Asia.

Primarily ships are carrying oil and liquefied natural gas from the Gulf, and consumer goods and electricals from China, Taiwan, and Bangladesh through this route, along with food and drink. Due to these attacks, vessels are choosing to divert, and this is causing delays, pushing up the cost of trade, and causing inflation to rise. For consumers, this could mean that an increase will likely be seen in the costs of everyday goods, as well as a shortage of products available to buy.

Comment

The situation above shows the importance of having the relevant clauses in contracts, wherever a business might sit in the supply chain. Time is of the essence in many contracts, and so manufacturers or suppliers could be in breach of an agreement for failing to comply with stipulated dates for delivery in the contract. A force majeure provision will protect a party, due to any situation which is beyond their control, preventing them from performing their part of the contract.

Nelsons has a specialist team of experts, who can advise on all stages of the contract process from negotiating terms to resolving any disputes that may arise.