Liquidated Damages Clause and Force Majeure under a Letter of Credit

If the exporter fails to ship the goods due to a force majeure event, can the importer still claim liquidated damages for the non-shipment?

This is a question that occasionally arises in letter of credit practice. The answer lies in distinguishing the bank’s obligations under the LC from the parties’ rights and obligations under the underlying sale contract.

Let’s look at the following Q&A.

Question

Dear Mr. Old Man,

Hope you are well.

A letter of credit contains a liquidated damages clause stipulating that if the goods are not shipped on time, the exporter must pay a time-based penalty.

If the exporter fails to ship the goods due to a force majeure event, such as the Iran–USA conflict, can the importer still claim the penalty for non-shipment?

Obidur Rashid Chanchal

Answer

Dear Obidur,

Thank you for your question.

From a letter of credit perspective, the answer is straightforward.

Under Article 4 of UCP 600, a credit is a separate transaction from the sale or other contract on which it is based. Therefore, if the exporter does not ship the goods, no complying presentation can be made. Once the credit expires without a complying presentation, the issuing bank is no longer obligated to honour or negotiate under the credit, regardless of whether the failure to ship resulted from a force majeure event.

Whether the importer can claim liquidated damages for the non-shipment is a separate matter.

This depends entirely on the terms of the underlying sale contract and the governing law. If the contract contains a force majeure clause that excuses the exporter from liability for delayed shipment or non-shipment under the circumstances, and the exporter has complied with all contractual requirements—such as giving timely notice and providing satisfactory evidence of the force majeure event—the importer would generally not be entitled to claim the contractual penalty.

On the other hand, if the contract does not excuse the exporter from liability, or if the exporter fails to satisfy the conditions for invoking force majeure, the importer may still be entitled to claim liquidated damages in accordance with the contract and the applicable law.

It should also be noted that Article 36 of UCP 600 deals solely with force majeure affecting banks and their operations. It does not govern the contractual rights and obligations between the importer and the exporter.

In summary, if no shipment is made, no complying presentation can occur and the issuing bank’s obligation under the LC ends upon expiry of the credit. Whether the importer can claim liquidated damages for the exporter’s failure to ship is not governed by UCP 600, but by the terms of the underlying sale contract and the applicable law. Whether a force majeure event relieves the exporter from liability depends on those terms and the governing law.

Best regards,

Mr. Old Man