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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by Glenn Ransier
Each set of ICC rules addresses something known as force majeure ("FM"). But exactly what is an FM? Loosely defined, it is an event that forces an issuer's/guarantor's business to be interrupted and unexpectedly closed. If an FM is declared, then a bank may or may not have certain obligations depending on its role. For purposes of this article, I will concentrate on the views and practices for banks that have a responsibility to process undertakings, i.e., letters of credit and demand guarantees as defined in UCP 600, URDG 758 and ISP98 after an FM is declared, notwithstanding that FM is also covered in URR 725 (reimbursement) and URC 522 (collections).
Force majeure events
While ISP98 describes the event as a bank being closed for "any reason", UCP 600 and URDG 758 attempt to limit FM by providing examples, i.e., riots, acts of God, etc., and limit the times when an FM can be engaged by ensuring that the reason for a closure is due to a "cause beyond its (a bank's) control".
On 11 September 2001, the bank with which I was employed experienced an FM event when the building in which it was located, 7 World Trade Center in New York, was destroyed along with all its systems and files. While we resumed business within 24 hours, a few banks contested the FM stance we utilized upon our recovery. We ultimately prevailed in all the cases in which I was involved, but we were challenged nevertheless.
In my view, any major catastrophe can be deemed a FM event, and each rule set mentioned above appears to agree.
There are many other natural or other events that could cause FM to come into effect, including but not limited to, hurricanes, war, civil uprisings, etc. The possibility of these events occurring, which prevent a bank's employees from entering their workplace or their ability to process work, should give rise to FM protocols, to be engaged in accordance with an undertaking's applicable rule set and a bank's internal policies - for example, engaging a back-up site, notifying clients and/or courier companies of your new address, etc. However, what happens in the case of lesser events? What if, say, a bank caused a strike by significantly undervaluing its workers or caused its own building to fall into disrepair and fail by not following recommended maintenance procedures? Are these events outside of a bank's control?
What's outside of a bank's control is certainly open for debate. There have been and continue to be court cases on the matter. Some examples include: Choctaw Generation Ltd Partnership v. American Home Assurance Co. 2001 U.S. App. LEXIS24809 (2d Cir.) [U.S.A.]; or Procter&Gamble Cellulose Co. v. Investbanka Beograd; 98 Civ. 2359; 2000 U.S. Dist. LEXIS 5636 (S.D.N.Y. 1 May 2000) [U.S.A.]; or Fortis Bank v. Indian Overseas Bank,  EWHC 84 (Comm) [Eng.] (Note: In this case experts were used to discuss force majeure.)
Choctaw Generation Ltd Partnership v. American Home Assurance Co
Procter&Gamble Cellulose Co. v. Investbanka Beograd
Fortis Bank v. Indian Overseas Bank
Should an event occur that would necessitate a bank citing FM, a bank must review each outstanding undertaking it has either issued or confirmed and determine which rule set governs it. The reason for this is simple: each of the three rule sets named above mandate very different approaches, actions or inactions.
UCP 600 article 36 states: "A bank assumes no liability or responsibility arising out of the interruption of its business by ... A bank will not upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business." While it may not appear fair, this rule effectively allows a bank to end its irrevocable obligation if an FM event occurs, or does it?
URDG 758 sub-article 26 (b): "Should the guarantee expire at a time when presentation or "payment" ... is prevented ... i. each of the guarantee and any counterguarantee shall be extended for a period of 30 calendar days from the date on which it would otherwise have expired, and the guarantor shall as soon as practicable inform the instructing party ... " [emphasis added]. Unlike UCP 600, URDG 758 mandates an extension of the undertaking for 30 calendar days from its current expiration date and includes an obligation to notify other parties in the unlikely event that the guarantor hasn't re-established its trade operations within 30 calendar days. Then, like UCP 600, its obligations cease.
guarantee and any counterguarantee shall be extended for a period of 30 calendar days from the date on which it would otherwise have expired
Under ISP98 Rule 3.14 (a): "If on the last business day for presentation the place for presentation ... then the last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business ... " [emphasis added]. Additionally, ISP98 allows a bank to designate "another reasonable place for presentation".
presentation re-opens for business
For undertakings subject to ISP98, whether issued or confirmed, a bank may decide to notify the various parties of the new place of presentation. If not, a bank is expected to clearly make known the day upon which it resumed business, because in these rules the "last day for presentation is automatically extended to the day occurring thirty calendar days after the place for presentation re-opens for business" [emphasis added].
One must note the interesting disparity between the rules on so basic a level. Commercial L/Cs, which generally are primary payment undertakings governed by UCP 600 to cover a movement of cargo, have the most to lose if a FM event is declared, whereas demand guarantees subject to URDG 758 and standby L/Cs subject to ISP98, both of which generally provide a secondary payment obligation, have ongoing duties. When the drafters of UCP 600 attempted to remedy this disparity, the ICC Banking Commission overruled them.
While two of the rule sets, URDG 758 and ISP98, discuss what happens in the event "presentation" cannot be made due to a FM event, only URDG 758 specifically looks at the examination and payment obligations that also become affected by such an event. Some examples include: (a) documents received prior to the FM event but not yet fully examined; and (b) documents examined by the issuer, deemed compliant but not yet paid.
URDG 758 article 26 (b) clearly articulates the actions needed in these situations: "ii. the running of the time for examination ... made but not yet examined ... shall be suspended until the resumption of the guarantor's business"; and "iii. a complying demand...presented before the force majeure but not paid ... shall be paid when the force majeure ceases even if that guarantee has expired... ".
URDG 758 is certainly the most comprehensive rule set where FM is concerned. An issuer which has closed due to an FM event has a number of obligations to maintain and actions to take. Because of this, beneficiaries and guarantors (secured by a counter guaranty) receive the most protection.
ISP98's FM rule appears to concentrate its focus on presentation of documents and does not delve into these documents or payments in process. This is left for interpretation and negotiation.
UCP 600 indicates that issuers will not honour or negotiate a letter of credit which expired during a FM event. "Honour" and "negotiation" are both defined terms in the UCP. However, one must wonder if a bank could be truly relieved of irrevocable obligations when it found documents to be complying and then either honoured a time draft by accepting it, or by creating a deferred payment obligation, or having negotiated it by committing to a fixed future payment. What would govern in these situations - L/C rules? L/C laws (if any)? laws for negotiable instruments? I note that even though my former employer was affected by the events of 9/11, we made a business decision not to find out how much protection the UCP offered. Rather, we promptly paid these types of obligations upon re-establishing our trade business.
Only one party
In many instances, only one banking party is affected by an FM event and not the other. The other, non-affected bank still retains its irrevocable obligations. The key is to remember to claim or present documents to that other bank ASAP. As a reminder, L/Cs governed by UCP 600 often nominate "any bank" to negotiate, so presentation does not need to occur at a confirming bank's counters, but rather "any bank's".
We have recently seen a series of FM events - a nuclear disaster in Japan, Hurricane Carlotta in Mexico, ongoing wildfires in the US state of Colorado, an armed conflict between South Sudan and the Republic of Sudan, etc. These kinds of events will never entirely disappear. While often one cannot prepare for the suddenness with which they occur, one can take steps to understand his rights and obligations should he find himself affected by such an event
Glenn Ransier is the Director Trade Finance Operations with ABNAMRO Capital USA. He was a member of the URDG Drafting Group and the Demand Guarantee Task Force. The views expressed are his personal views and do not necessarily reflect those of ABNAMRO. His e-mail is email@example.com
is the Director Trade Finance Operations with ABNAMRO Capital USA. He was a member of the URDG Drafting Group and the Demand Guarantee Task Force. The views expressed are his personal views and do not necessarily reflect those of ABNAMRO. His e-mail is firstname.lastname@example.org