THE FORCE MAJEURE RULE

The Force Majeure Rule *
By Nguyen Huu Duc and Kim Christensen

Nguyen Huu Duc is Deputy Director of Vietcombank Da Nang
See bio here: http://tradeservicesupdate.com/editor_duc

Kim Christensen is Vice President and Head of Trade Products & Business Relations at Nordea Trade Finance
See bio here: http://tradeservicesupdate.com/editor_christensen

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A powerful 8.9 magnitude earthquake accompanied by a ten meter tsunami hit Japan on Friday, 11 March 2011, engulfing many towns along the northern coast of Japan. As a result of this force majeure event, thousands of businesses including banks in the affected areas had to close their businesses.

The question is raised as to whether a bank whose business is interrupted due to a force majeure event can exclude its liability under an LC that expired during such an interruption of its business.

Or in other words: Is it true or false that a bank that closes its business due to a force majeure event will not, upon resumption of its business, honour or negotiate under an LC that expired during such interruption?

Below are three case studies for the purpose of analysing the situation and answering the question above.

What Does Article 36 say?

Article 36 says: ‘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.’

Reading article 36 and assuming that an issuing bank in Japan has to close its business due to the said earthquake and tsunami, the beneficiary has good reason to worry that the issuing bank will not, upon resumption of its business, honour the LC. Similarly, the nominated bank that has honoured or negotiated the LC has the same worry: that it will not be reimbursed by the issuing bank.

Case Study I
Bank I (Sendai, Japan) issues a confirmed LC in favour of Ben B (Vietnam).
The LC is available at the counter of Bank C by payment.
Date and place of expiry: 15 March, 2011 in Vietnam.
Bank C adds its confirmation and advises the LC to Ben B.
Bank I closes its business on 11 March 2011.
Ben B effects shipment on 8 March 2011 (two days before the occurrence of the earthquake and tsunami) and makes a complying presentation to Bank C on 12 March 2011.

Some questions arising from the situation:

(1) Can Bank C refuse to honour the presentation based on article 36 if it learns that Bank I has closed its business due to the earthquake and tsunami?

(2) Bank C honoured and forwarded the documents to Bank I by DHL Courier Service, but the documents can not be delivered to Bank I because Bank I closed its business due to the force majeure event. Can Bank I, upon resumption of its business, refuse to reimburse Bank C based on article 36?

Analysis and Conclusion Case Study I
(1) The earthquake and tsunami occurred in Japan but the LC was available with Bank C by payment and the date and place of expiry was in Vietnam. Ben B made a complying presentation to Bank C, which was open during the force majeure event. Consequently Ben B must be honoured. Article 36 is not applicable to Bank C in this situation. It must honour in accordance with UCP 600 sub-article 8(a) irrespective of whether or not it will be reimbursed by Bank I.

This is a vivid example of how a confirmed LC can help the beneficiary avoid the risk of non-payment by the issuing bank and other risks associated with the issuing bank’s country.

(2) The earthquake and tsunami occurred in Japan while the LC was available at Bank C by payment and the date and place of expiry was in Vietnam. As the nominated bank, Bank C honoured the LC, hence, it is entitled to reimbursement from Bank I.

Article 36 is not applicable to Bank I in this situation. Bank I, upon resumption of its business, must reimburse Bank C even when the documents previously forwarded to it were lost in transit. The argument for this, in this particular case, is the nominated confirming bank’s right to reimbursement from the issuing bank – i.e., its protection under UCP 600 sub-article 7(c) (Issuing Bank Undertaking) and article 35 (documents lost in transit).

Case Study II
Bank I (Sendai, Japan) issues an LC in favour of Ben B (Vietnam).
The LC is available at the counter of Bank I.
Date and place of expiry: 15 March 2011 in Japan.
Bank C advises the LC to Ben B.
Ben B effects shipment 8 March 2011.
Bank I closes its business on 11 March 2011.

A question arises from the situation:

Bank C is not nominated to act under the LC and the LC is available at the counter of Bank I (in Japan). Bank C on behalf of Ben B forwarded the documents to Bank I for payment, but the documents could not be delivered to Bank I within the credit validity because Bank I closed its business due to the force majeure event. Can Bank I, upon resumption of its business, refuse to honour based on article 36?

Analysis and Conclusion Case Study II
The LC was available by payment at the counter of Bank I but the documents could not be presented within the credit validity as Bank I had to close its business due to the earthquake and tsunami that occurred in Japan. Article 36 is applicable to Bank I in this situation, that is, Bank I, upon resumption of its business, can refuse to honour. The LC expired during the interruption of its business based on this article.

Reflecting on this case it is natural to also address two following variations:

(a) The presentation is made to Bank I before the force majeure event, but the documents are not examined due to the force majeure event.
(b) A complying presentation is made to Bank I before the force majeure but not paid because of the force majeure event. (Bank I examined the documents and determined that they complied with the LC BUT did not pay because of the force majeure event.)

In both cases it is assumed that UCP 600 article 36 is not applicable. Since the presentation was made before the force majeure and within the LC validity, the confirming bank/issuing bank, upon resumption of its business, must honour if the documents presented constitute a complying presentation.

It may not be appropriate to use URDG 758 article 26 to support this view, but it must be expected that if the ICC were to issue a statement on the interpretation of UCP 600 article 36, their view would be based on the spirit of URDG 758 article 26.

Case Study III
Bank I (Sendai, Japan) issues a confirmed LC in favour of Ben B (Vietnam).
The LC is available at the counter of Bank C by payment.
Date and place of expiry: 15 March 2011 in Vietnam.
Bank C adds its confirmation and advises the LC to Ben B.
Ben B effects shipment 8 March 2011
Bank C closes its business on 11 March 2011 due to the occurrence of an earthquake and tsunami in Vietnam.
On 12 March, Ben B attempts to present documents to Bank C, but in vain because Bank C has closed its business due to the earthquake and tsunami

A question arises from the situation:

In this case the earthquake and tsunami occurred in Vietnam and Bank C had to close its business. As a result of this, Ben B could not present the documents to Bank C within the LC validity. Can Bank C, upon resumption of its business, refuse to hon
our the LC based on article 36? Is there any situation where Ben B’s presentation would be honoured?

Analysis and Conclusion Case Study III
The earthquake and tsunami occurred in Vietnam, the LC was available at Bank C by payment, and the date and place of expiry was in Vietnam.

Article 36 is applicable to Bank C in this situation. Bank C, upon resumption of its business can refuse to honour under the LC that expired during the interruption of its business. It should be noted however that UCP 600 article 6 (a) allows the beneficiary to make a presentation directly to the issuing bank bypassing the nominated bank. Bank C closed its business, hence, Ben B can, within the credit validity, make the presentation to Bank I. Bank I must honour upon receipt of the complying documents.

Conclusion
The article opened with the question as to whether it is true or false that a bank will not, upon resumption of its business, honour or negotiate under an LC that expires during such interruption.

As it appears from the above, the answer is true and false! Or rather that it depends: The key points that determine whether the confirming bank or the issuing bank is released of its obligation to honour under an LC that expires during an interruption of its business due to a force majeure event are the terms and conditions of the LC and where the earthquake and tsunami occurred.

In short, if the LC is stipulated to be available with a bank whose business is interrupted by a force majeure event, then in accordance with article 36, that bank will not, upon resumption of its business, honour or negotiate the LC that expired during such interruption of business.

The force majeure question asked in this issue of the TSU Newsletter (article 35, 2nd para, versus article 36 /volume 13, issue 2, March – April 2011) and the following discussion among the TSU editors inspired this article.

It is an area of the UCP 600 where practically no documented practice exists, hence some of the views expressed in the article are indeed debatable and will hopefully lead to similar debates within the industry.

Any other views, comments, and arguments are highly appreciated.
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*This article was published in Trade Services Update Volume 13, Issue 2, March – April 2011