Canadian Pacific Railway has taken the unprecedented step of declaring force majeure on its grain shipping contracts.
As a result, any demurrage or other penalties arising from the late delivery of rail cars carrying grain or grain products are suspended indefinitely, the railway said in a Feb. 4 notice to grain shippers.
The railway says severe cold and blizzards on the Prairies, combined with avalanches that shut down the main rail line through the mountains for several days, have made it impossible to maintain normal operations in recent weeks.
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In its notice, CP said it will restrict new car orders across its system and suspend all rail car movement to Vancouver for the week ending Feb. 21. But the unilateral declaration has been rejected by CP’s biggest customer.
“We do not accept this notice as a declaration of force majeure,” said Canadian Wheat Board spokesperson Deanna Allen.
She said the board has problems with CP’s notice, including lack of detail about the impact on specific contracts and the duration of the force majeure, the fact that it is retroactive to Jan. 25 and the informal nature of the notice, including the fact it was delivered as an e-mail from a manager in CP’s grain division.
“We would expect it to be a more detailed and legalistic process when they unilaterally suspend any penalties or demurrage,” said Allen.
An official with CP said the railway is confident about the legality of its notice and expressed surprise at the board’s reaction.
“The feedback we’ve had from other customers has been quite positive,” said railway spokesperson Leah Olson. “They appreciate knowing what is going on and why service hasn’t been normal and most of them recognize that the events that are occurring are out of our control.”
Force majeure, roughly synonymous with act of God, is a legal term referring to unpredictable acts of nature beyond the control of human action that prevent a contract from being fulfilled.
Allen said the board recognizes that bad weather has interfered with railway operations in the past month, but said problems with CP’s performance have been building for some time.
During the four-week period from Jan. 25 to Feb. 21, the wheat board requested 6,434 rail cars from CP for export shipments and the railway accepted 3,386 of those orders, or 53 percent. During the same period it placed orders for 8,811 cars from Canadian National Railway, of which 5,365, or 61 percent, were accepted.
As this week began, the board was an accumulated 3,200 rail cars behind schedule.
Allen said while that shortfall hasn’t translated into vessel demurrage charges or lost sales, the marketing agency is concerned.
“If it persists, and if we’ve got no cars from CP at all next week, then we’re going to have some problems,” she said.
Lach Coburn, west coast operations manager for Cargill and president of the Vancouver Grain Exporters’ Association, said the force majeure could become an expensive proposition for exporters.
Due to increases in ocean freight rates in recent months, vessel demurrage rates have increased to a range of $14,000 to $20,000 per day from the traditional level of $6,000 to $8,000.
Richard Wansbutter of Saskatchewan Wheat Pool said grain companies and the CWB won’t be able to avoid those demurrage charges because only CP (and not CN) has invoked force majeure.
“We can’t invoke force majeure for the West Coast … so we are at risk on the vessel side,” he said.
Francois Catellier, executive director of the Canadian Special Crops Association, said he hasn’t heard from special crop shippers about any immediate financial threat from the rail car shortfall.
And he accepted the railway’s decision to invoke force majeure.
“This is Mother Nature at work,” he said. “Holding CP responsible for avalanches is not fair.”
Olson said the railway can’t make any promises as to when the railway will catch up to demand: “We don’t want to be misleading. The challenges are big and it will be some time before service returns to normal.”
