The Strait of Hormuz is a prime example of how quickly a geopolitical risk can turn into a contractual problem. When transport routes become unsafe, insurance premiums rise or alternative routes must be chosen, the question is not merely whether delivery is possible. The key economic issue is often: who bears the additional costs?
The answer is not always clear from the contract. Incoterms, delivery deadlines and force majeure clauses often cover only certain aspects. This can lead to significant disputes, particularly in international supply contracts.
Supply chain disruptions pose cost risks
When drafting contracts, attention is often paid to when delivery must take place, when risk and title pass, and what the consequences of a delay in delivery are. Less care is often taken to specify who bears additional costs if the supply chain comes under pressure.
This applies in particular to international trade transactions involving longer transport routes and multiple parties: sellers, buyers, carriers, freight forwarders, warehouse keepers, port operators and insurers.
If disruptions occur, it is not just timely delivery that is called into question. Disputes often arise over whether additional costs may be passed on or remain within the risk scope of one party.
Typical additional costs in international supply chains
Of particular practical relevance are:
- diversion costs due to changed transport routes,
- War risk surcharges and increased insurance premiums,
- additional storage and handling costs,
- detention and demurrage,
- additional costs due to delayed delivery or collection,
- costs arising from temporary storage, return transport or replacement procurement.
These costs can reach substantial levels. Moreover, they often arise at short notice, whilst the contractual basis for passing them on remains unclear.
Incoterms do not resolve every cost issue
Incoterms are indispensable for international supply contracts. In particular, they govern the place of delivery, the transfer of risk and certain cost items between seller and buyer.
However, they do not replace a comprehensive framework for crisis and disruption situations. Even with clauses such as CIF, CFR, FOB or DAP, the Incoterm code does not automatically determine every subsequent additional cost item.
Companies should therefore avoid treating Incoterms as a comprehensive risk allocation system. They are an important component, but no substitute for a precise additional costs clause.
Force majeure does not automatically protect against additional costs
Force majeure clauses are also of limited help. They often stipulate whether performance obligations are temporarily suspended or whether liability for delays is excluded.
This must be distinguished from the question of who bears the additional costs incurred during the disruption. A party may be exempt from liability for late delivery and yet still have no clear basis for passing on additional costs to the other party.
Force majeure clauses should therefore be accompanied by obligations regarding costs, information and cooperation.
What companies should check in their contracts
International supply contracts should, in particular, expressly regulate the following points:
- Which additional costs may be passed on?
- At what threshold does a duty to notify arise?
- Who decides on alternative transport routes?
- What evidence is required for additional costs?
- How are war risk surcharges, detention and demurrage handled?
- Is there a right to amend or terminate the contract in the event of a permanent increase in costs?
It is crucial that commercial, transport law and insurance-related provisions are consistent.
Conclusion
Supply chain disruptions cannot be completely avoided. However, their economic consequences can be managed through contracts.
Companies should not only review international supply contracts for delivery obligations, transfer of risk and liability. Equally important is the clear allocation of additional costs.
Anyone who fails to expressly regulate demurrage, war-risk surcharges, diversion costs and storage costs risks, in the event of a dispute, a conflict over precisely those costs that are particularly painful financially.
The most important points in brief
- Supply chain disruptions often cause significant additional costs, not just delays.
- Incoterms and force majeure clauses often do not fully regulate the allocation of costs.
- Companies should explicitly include demurrage, war risk, re-routing and obligations to provide evidence in their contracts.
