Force Majeure or not Force Majeure
… that’s the question.
I have received many comments to my previous blog post “Trade Finance and the coronavirus”. A number of those circled around the issue of Force Majeure.
For example there was the comment that CCPIT (China Council for the Promotion of International Trade) has already declared it is issuing Force Majeure certificates to Chinese companies impacted. Also it has been mentioned that it already has been reported that Force Majeure is declared by the Chinese authorities.
These are good and relevant comments – and indeed highly appreciated.
The fact is, that the issue of Force Majeure – also when it comes to Trade Finance transactions – is indeed difficult and complex. The relevant practice rules (in scope here is UCP 600 article 36, URDG 758 article 26, URC 522 article 15), aim to set a standard. For example UCP 600 article 36 states:
“A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.
A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.”
There are a number of comments relevant in respect of this.
First of all, it is important to stress that the list of events (Acts of God, riots, civil commotions etc.) is not exhaustive and there may well be other events that would be deemed as “Force Majeure”.
That said, It is indicated in the rules (e.g. in article 36 mentioned above) that there must be an “interruption of the banks business” for the Force Majeure rule to be “triggered”. This is generally understood so that the bank is closed for business because of the Force Majeure event. However, at the end of the day, that will be for a court of law to determine.
At the time of writing the blog-post it was my impression (and it still is – but that may well change as the situation changes) that the banks in the Hubei Province in China is not closed for business. Rather, there is a problem in getting physical documents to and from the banks in the Hubei Province in China.
Adding to the complexity, it is fair to say that UCP 600 article 36 asks a lot of (unanswered) questions. It seems not to take into account 1) that the counterpart banks may have different statuses (nominated, advising, confirming) and 2) that there are many phases during an LC transaction – and a Force Majeure event will have different consequences depending on the phase; e.g.
* Documents delivered to the nominated bank – but not forwarded to the issuing bank.
* Documents received at the issuing bank – but not examined.
* Documents received at the issuing bank, examined – but not honoured.
This makes UCP 600 article 36 difficult to apply in practice. Not least because there (fortunately) are very few Force Majeure events, meaning that there is little documented practice.
In that respect it is fair to say, that the most “mature” Force Majeure rule is expressed in URDG 758 article 26. Simply look at the number of words in the article; 396 words.
This compared to 66 words in UCP 600 article 35 and 37 words in URC 522.
Here I will not quote the full text of URDG 758 article 26, but rather outline the scenarios covered by it:
* The guarantee expire when presentation or payment under that guarantee is prevented by Force Majeure
* A complying demand under the guarantee is presented before the Force Majeure but not paid because of the Force Majeure
* The counter-guarantee expire at a time when presentation or payment under that counter-guarantee is prevented by Force Majeure
* A complying demand under the counter-guarantee is presented before the Force Majeure but not paid because of the Force Majeure
In other words, it may indeed be difficult to determine if an event is actually a Force Majeure event for the purpose of the applicable Trade Finance rules, and has been stated, there is indeed quite some difference in the potential outcome.
If there is a Force Majeure event (for the purpose of the applicable Trade Finance rules), “A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business” (UCP 600 article 36). I.e. the potential consequence is that the bank may not pay at all.
However, if there is not a Force Majeure event, the Force Majeure article does not apply. If that is the case, then the other relevant rules apply. For example in the situation where it is not possible to send the documents presented under an LC to the issuing bank. In such case the 2nd paragraph of UCP 600 article 35 will apply. It reads as follows:
“If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.”
The consequence of the above is that, if:
1: A presentation has been made to a nominated bank (which may or may not be a confirming bank) AND
2: The nominated bank has forwarded the documents to the issuing bank (according to the instructions in the LC) AND
3: The documents are delayed or lost in transit between the nominated bank and the issuing bank THEN
4: The issuing bank must reimburse the nominated bank, THIS APPLIES
5: Regardless if the nominated bank has acted on its nomination (i.e. has honoured or negotiated)
In other words, in this case the issuing bank is obligated to reimburse the nominated bank…
The above said, let’s hope that the situation related to the coronavirus gets under control – and that it will not be necessary to have to determine if article 35 or 36 applies …
Take care of each other and the Trade Finance products
Kind regards
Kim