lcviews CoronAdvice #1: Is this Force Majeure?
This is the first blogpost in the new segment “lcviews CoronAdvice”. The intention is to address some of the questions asked and issues raised about the effect of the coronavirus situation on the Trade Finance instruments.
Many of the questions asked relate to whether or not the coronavirus is a Force Majeure situation.
Force Majeure means “superior force” and is broadly used to describe an event or effect that cannot be reasonably anticipated or controlled. However, for the purpose of trade it is a clause in an agreement or contract describing the consequences of Force Majeure events (defined in the agreement) for the purpose of the agreement. This means that a party claiming Force Majeure would need to prove that their ability to meet the contract was “impaired” or made “impossible” due to an event described in the contract.
For that reason, Force Majeure takes the outset in 1) what has happened and 2) what has been agreed. This is the case for agreements between the buyers and the sellers. However, it is also the case for Trade Finance transactions, as each of the Trade Finance practice rules (UCP 600, URDG 758, URR 522 and ISP98) include articles that address Force Majeure situations.
The Million Dollar question is if the coronavirus situation is a Force Majeure situation. There is no doubt, that the situation is generally seen as a Force Majeure event. It is even reported that China has issued a record number of Force Majeure certificates in an attempt to exempt local exporters from fulfilling contractual agreements with overseas buyers due to the coronavirus outbreak.
However, for the purpose of the agreements, contracts – and Trade Finance rules it will depend on the consequences for the actual transaction.
All of the Trade Finance rules (UCP 600, URDG 758, URR 522 and ISP98) include articles that address Force Majeure situations (ISP98 takes a bit different approach as it addresses the situation where on the last business day for presentation the place for presentation stated in a standby is for any reason closed).
Common for all, is that they assume that the business of the affected bank is interrupted and/or that the bank is closed for business. There is only little practice regarding this; however, it should at least be so that the effect of the interruption is that presentation of documents / demands, examination of the documents / demands as well as payment are prevented by the situation.
The potential consequence of a Force Majeure event for the purpose of the Trade Finance rules varies a lot. For LCs (subject to UCP 600) a bank that has been closed due to a Force Majeure event, will not, after it re-open for business, honour or negotiate under an LC that expired during the Force Majeure event. The other extreme is Standby Letters of Credit (subject to ISP98) where the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business.
In this situation most banks, if not all, have activated their contingency plans to support the customers business. This is the logic and reasonable approach. However, as long as a bank is able to do that, it is not likely that such bank would be able to call Force Majeure.
Recently it is been reported that Philippine banks are under lockdown until further notice due to COVID-19. Whether or not that is Force Majeure according to the Trade Finance rules is unclear – and will most likely only be answered if a case affected by the lockdown is taken to a court of law.
Takeaways:
* All of the Trade Finance rules include articles that address Force Majeure situations
* They all assume that the business of the affected bank is interrupted and/or that the bank is closed for business
* The potential consequence of a Force Majeure event for the purpose of the Trade Finance rules varies a lot
* Whether or not the coronavirus is Force Majeure according to the Trade Finance rules is unclear – and will most likely only be answered if a case affected by the lockdown is taken to a court of law
During next week, there will be more blogposts in this segment addressing other questions asked.
Meanwhile – as always, take care of the LC – but take special care of each other during these difficult times.
Kind regards
Kim