ICC Digital Library Forum

As we all know, the Force Majeure provision under UCP article no. 17 “… Unless specifically authorized, banks will not upon resumption of their business, pay, incur a deferred payment undertaking, accept Draft(s) or negotiate under Credits which expired during such interruption of their business” differs from ISP98 rule no. 3.14 (automatic 30 calendar-day extension of the last day for presentation after the place of presentation reopens for business, unless the standby otherwise provides). Although there are ways to protect the beneficiaries’ rights under UCP article no. 17, it is my understanding that due to the September 11th events, ICC is now intending to modify the concerned article in line with ISP98 rule no. 3.14. Is that correct?

Changes to the UCP are not made lightly. They require proposal and assent of the ICC Banking Commission. Upto the last meeting of the Banking Commission about one month ago, no such proposal was placed before us.

If such a proposal was placed, I do not think that it would succeed. It may be appropriate for standbys, but UCP has to cater for all DCs and this proposal would be unsuitable for this.

Laurence

I do not see what ‘11 September’ changes, apart perhaps from highlighting the risk that Article 17 can pose to a beneficiary. I would also observe that the beneficiary has the possibility of stipulating, in for example the sales contract, that Article 17 is excluded from the credit provisions. Therefore, I do not see any need for the Banking Commission to concern itself with this matter (however, I would not be worried if it chose to).

I agree with the comments given above. The terorists attacks are still less common „Force Majeure“ cause then for instance „earthquakes, riots, strikes" etc. (and I very much hope it will continue to be so…), consequently I would not vote for taking it too far.

Pavel Andrle
[edited 5/24/02 3:02:15 PM]

Dimitri,

I tend to agree with Jeremy, we have seen commercial and standby letters of credit amending the article way before the Sept. 11 incidence or even before ISP 98 was put in force.

On the other hand, you remember that during the Gulf War, the beneficiaries of LC's issued from the region covered this risk by having the LC's confirmed by banks in their country and did not worry much about article 17.

regards
[edited 5/25/02 10:35:02 AM]

I’m not an advocate of such a proposal myself. This information was passed to me by a colleague, a senior Trade officer in our bank, and since we’ll be jointly conducting a customer seminar on LC’s shortly, I wanted to verify it well in advance.

As previously mentioned, if the beneficiary wants to protect his rights he could either agree with the applicant to exclude Article no. 17 or add a clause in the credit to allow presentation under the LC within x number of days after reopening for business, notwithstanding Article no. 17.

Lawrence,
Thanks for your input.

I am now back from Vienna after an audition of the famous Musikverein where one has to pay USD1,000 plus and wait for five to ten years to attend the noon day New Year Waltz Concert.

HOW TO DEAL WITH FORCE MAJEURE

However, according to “Force Majeure and Hardship” Rules, ICC Publication No. 421, made by the ICC Commission on Commercial Practice (of which we are also participating as a representative of Canada) war may be included as a kind of force majeure PROVIDED parties have specified war clearly in the scope of force majeure in their contracts. Merely putting on the contracts or the DCs the magic words 'force majeure' may not create the protection parties originally intend.

Hence this is an authoritative opinion to support that parties must specify in their contracts or DCs the scope of the force majeure if they really mean to get the protection they need.

FORCE MAJEURE V. WAR LIKE ACTIONS

We must not mix up force majeure with war or war like actions (an insurance jargon to broaden the scope of war). In cargo insurance, war is treated independently and not classified as a kind of force majeure. Hence even a party is covered by ICC (A), he has to cover war additionally in order to get protected against the war risks.

DEFINITION OF THE 911 ATTACKS BY THE USA

The USA started the "war in Middle East" in Afghanistan (which is in fact not regarded as a part of Middle East by bankers in the Middle East that we met but considered so by CNN) based on her interpretation of the 911 attack by the terrorists an act of war to the people of United States.

UCP 500 ARTICLE 17 IS UNCLEAR ON WAR OR WAR LIKE ACTIONS

Article 17 of UCP 500 may rule on force majeure only and not necessarily also on war or war like actions.

There is a need for the ICC BC to clarify in UCP X00 whether or not war is considered as a kind of force majeure. However, this is a very sophisticated issue beyond the scope of competence of an ordinary banker to determine.

WHAT PARTIES SHOULD DO TO PROTECT THEMSELVES

Before the emergency of UCP X00, to avoid disputes, parties should state in their DCs whether or not war, war like actions, including terrorist actions, are to be included in Article 17. After the 911 this issue becomes a very practical one that no one should ignore from risk management point of view.

TO US DC IS NOT A BANKING THING ALONE

This is another good example to illustrate that to do DC well, merely banking knowledge is not enough. To us DC is not merely a banking thing but a host of sophisticated peripheral technologies, knowledge and experiences.

www.tolee.com

[edited 6/6/02 7:12:56 PM]

Whilst I fully accept T.O's point about the distinction between Force Majeure and war from the insurance and other viewpoints, Article 17 includes war under the group of risks covered by Force Majeure relating to the UCP. However, the wording used "interruption of their business" is very much open to interpretation. If one branch of a bank only is closed, does this constitute such "interruption" ? If a DC is confirmed and only the issuing bank later becomes affected by a war situation, can the confirming bank claim "interruption of their business" ?

Since the vast majority of DC business, thankfully is not affected by the risks detailed in Article 17, this Article is not given the frequent pragmatic testing of other Articles such as 23-29, 34 & 37. Although comparatively infrequently referred to, I agree with T.O. that the next revision of UCP should take a more detailed look at this Article.

Laurence

Lawrence,

Thanks for your supporting views.

INDEPENDENT PAYMENT UNDERTAKINGS IN THEORY

If the business of one of the two banks that have payment obligations to compliant documents (the issuing bank and the confirming bank) is interrupted due to war or war like actions, then from the basic concept of DC operations, the beneficiary, IN THEORY, has the right to shoot at two INDEPENDENT targets, the issuing bank and the confirming bank.

If one target disappears, then he may shoot at the remaining target. The other bank cannot rely on business interruptions under Article 17 of UCP 500 to dishonour payment, because the payment obligations of the two banks are INDEPENDENT. So even one of the two banks is closed due to bankruptcy, the payment obligation of the remaining bank is still there, unaffected.

IN PRACTCE, BANKERS MAY ACT DIFFERENTLY

Having said that, IN PRACTICE, from our experience in resolving global DC disputes, certain bankers may use this Article 17 as a reason to deny payment, particularly when they know that there are disputes amongst the applicants and the beneficiaries. This would create the opportunity for the DC consultants to get their bread and butter, rice and noodles. Don’t you agree?

For those members who love watching World Cup 2002, I got up at 11.00 am this morning after watching the game between China and Costa Rica and am quite disappointed at the performance of China. Since 1 June I have a giant Brazil flag hanging at the front door of my home office in Toronto to show my personal favours.

www.tolee.com

[edited 6/5/02 3:01:50 PM]

BANKERS ARE NOT SO DIFFERENT

T.O., if bankers are faced with a situation where they have accepted a risk by confirming a credit, and subsequently find that they may have difficulty in obtaining reimbursement from the issuing bank for any reason (war, insolvency etc), they act like any commercial organisation in trying to protect their interests. If they can do so validly by pointing to practices in UCP or implied therein, they will do so. Otherwise they will look for the next best thing. If it is debatable whether or not Article 17 applies in such a situation, the bank will naturally seize the opportunity to claim that it does.

HEADLINE IN IRISH NEWSPAPER
Germany v Ireland result spoiled by English.
This is not what you might think ! It refers to the disappointment of students sitting Leaving Cert. exams (English subject) not being able to see the match.

Laurence