Banking

UCP600 Article 36: Force Majeure Explained with Examples

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Clause 1:

Clause: “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.”

Explanation: This clause specifies that banks are not liable for any interruptions in their services caused by events that are beyond their control, commonly referred to as “force majeure” events. These events include natural disasters (Acts of God), social or political unrest (riots, civil commotions, insurrections), wars, acts of terrorism, and labor disputes (strikes or lockouts). The clause ensures that banks are protected from being held responsible for disruptions in their business due to these uncontrollable events.

Example: Imagine a bank in a country experiencing severe flooding due to a hurricane (an Act of God). The flooding disrupts the bank’s operations, making it impossible to process transactions or honor letters of credit. Under UCP600 Article 36, the bank is not liable for any financial losses or consequences that customers might face due to this interruption.

Clause 2:

Clause: “A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.”

Explanation: This clause indicates that if a letter of credit expires while a bank’s operations are interrupted due to a force majeure event, the bank is not obligated to honor or negotiate the credit once it resumes business. This provision ensures that banks are not forced to process expired credits after their operations have been restored.

Example: Consider a bank that had to close its offices for two weeks due to a violent civil commotion in the city. During this period, a letter of credit that was issued by the bank expired. According to UCP600 Article 36, once the bank resumes its operations, it is not required to honor or negotiate the expired letter of credit. The beneficiary of the credit cannot demand payment or negotiation of the credit post-expiry due to the force majeure event that caused the interruption.

UCP600 Article 32 Explanation: Instalment Drawings or Shipments

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Instalment Drawings or Shipments

Clause: “If a drawing or shipment by instalments within given periods is stipulated in the credit and any instalment is not drawn or shipped within the period allowed for that instalment, the credit ceases to be available for that and any subsequent instalment.”

Explanation: This clause indicates that if a letter of credit requires shipments or drawings to be made in specific instalments within defined periods, the failure to meet the deadline for any one instalment results in the cancellation of the entire credit for that and all future instalments. In essence, missing a single instalment deadline nullifies the credit’s availability for any further instalments, even if they are within their specified periods.

Example: A buyer opens a letter of credit (L/C) requiring a seller to ship 1000 units of goods in three instalments as follows:

  1. 1st instalment: 300 units to be shipped by January 31.
  2. 2nd instalment: 300 units to be shipped by February 28.
  3. 3rd instalment: 400 units to be shipped by March 31.

If the seller fails to ship the 300 units by January 31, the credit will no longer be available for the February and March shipments. The entire L/C becomes void due to the failure to comply with the shipment schedule stipulated for the first instalment.

Clause-by-Clause Explanation and Examples

Clause: “If a drawing or shipment by instalments within given periods is stipulated in the credit…”

Explanation: The letter of credit specifies that shipments or drawings must occur in predetermined instalments over set periods.

Example: A letter of credit outlines that a supplier must ship 500 units of goods in two instalments:

  • 1st instalment: 250 units by July 31.
  • 2nd instalment: 250 units by August 31.

Clause: “…and any instalment is not drawn or shipped within the period allowed for that instalment…”

Explanation: If the shipment or drawing for any instalment is not completed within the stipulated timeframe, it means the seller has failed to meet the conditions for that instalment.

Example: If the supplier ships only 200 units by July 31 instead of the required 250 units, they have not met the conditions for the first instalment.

Clause: “…the credit ceases to be available for that and any subsequent instalment.”

Explanation: Failing to meet the timeframe for any instalment results in the termination of the letter of credit for both the current and all future instalments.

Example: Due to the failure to ship the required 250 units by July 31, the entire L/C is void. Consequently, the supplier cannot use the L/C for the August shipment of 250 units, rendering the credit invalid for any remaining instalments.

UCP600 Article 29: Extensions for Expiry Dates and Presentation Days Explained

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UCP600 Article 29 Explained

Clause (a)

Clause: “If the expiry date of a credit or the last day for presentation falls on a day when the bank to which presentation is to be made is closed for reasons other than those referred to in article 36, the expiry date or the last day for presentation, as the case may be, will be extended to the first following banking day.”

Explanation: If the expiry date of a credit or the final day for document presentation coincides with a day when the bank is closed for reasons not covered under Article 36 (such as public riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control), the deadline is automatically extended to the next business day when the bank is open.

Example: A letter of credit expires on 1st January. The bank where the documents are to be presented is closed on 1st January for New Year’s Day (a public holiday), which is not falling under reasons covered in Article 36 (such as public riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its control.) Therefore, the expiry date is extended to 2nd January, the next business day.

Clause (b)

Clause: “If presentation is made on the first following banking day, a nominated bank must provide the issuing bank or confirming bank with a statement on its covering schedule that the presentation was made within the time limits extended in accordance with sub-article 29 (a).”

Explanation: When documents are presented on the first business day following an extended deadline, the nominated bank must include a statement on its cover schedule indicating that the presentation occurred within the extended time frame as per sub-article 29(a).

Example: Documents are presented to the nominated bank on 2nd January (following the extended deadline). The nominated bank must state on its covering schedule to the issuing bank, “Documents presented within the extended time limits as per UCP600 Article 29(a).”

Clause (c)

Clause: “The latest date for shipment will not be extended as a result of sub-article 29 (a).”

Explanation: The provision to extend the expiry date or the last day for document presentation does not apply to the latest date of shipment. The shipment date remains fixed and unchangeable even if the presentation deadline is extended.

Example: A letter of credit specifies the latest shipment date as 25th December, and the presentation deadline as 1st January. If the presentation deadline is extended to 2nd January due to the bank being closed, the shipment must still occur by 25th December, without extension.

Summary

Article 29 of UCP600 addresses situations where the expiry date or the last day for document presentation falls on a non-banking day for reasons other than those mentioned in Article 36. It extends the deadline to the next banking day but does not affect the shipment date. Proper documentation and statements are required to inform all parties of the extended deadlines.