The corona virus (COVID-19) outbreak has spread from Wuhan in China across the globe, including to all of the Nordic countries. Kim Sindberg, Executive Adviser to Nordea and Technical Advisor to the ICC Banking Commission, assesses the questions COVID-19 raises for Trade Finance offerings such as Documentary Credits, Collections, Guarantees and Standby Letters of Credit.
Please note that the information given in this article is based on the information currently available, taking into account that that situation changes and evolves from day to day.
About Force Majeure
In assessing the wide spread disruption caused by COVID-19, many questions relate to whether or not the coronavirus constitutes 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 which describes 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 one of the events agreed in the contract – and otherwise based upon the “Force Majeure clause” in the contract. In other words – Force Majeure takes the outset in 1) what has happened and 2) what has been agreed. This applies to both the agreement between the buyer and the seller. However, it applies equally to the applicable Trade Finance rules based upon the relevant product.
The million dollar question is whether the coronavirus situation can be described as a Force Majeure situation. There is no doubt that disruption caused by coronavirus is generally seen as a Force Majeure event as it is something that you have no control of like a natural disaster. However, for the purpose of the agreements, contracts and Trade Finance rules it will depend on the set of circumstances related to each particular case in respect of the actual transaction.
All of the Trade Finance rules (for example International Chamber of Commerce (ICC) rules UCP 600, URDG 758, URR 522 and ISP98) include articles that address Force Majeure situations. 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 Documentary Credits (subject to UCP 600) a bank that has been closed due to a Force Majeure event, will not, after it re-opens for business, honour or negotiate under a Documentary Credit 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.
For Nordea, the coronavirus situation means that contingency plans have been activated to ensure that it is still possible to handle customer business. Other banks are doing the same. This of course is the logic and correct approach. However, as long as the bank is open in one form or the other this also means that this cannot be described as a Force Majeure situation for the purpose of the Trade Finance rules listed above.
For Nordea, the coronavirus situation means that contingency plans have been activated to ensure that it is still possible to handle customer business.
Kim Sindberg, Executive Adviser to Nordea and Technical Advisor to the ICC Banking Commission
The practical consequences
Although technically, at this point in time the situation may not be classed as a Force Majeure, it is still troublesome – to say the least, and of course has consequences. Widespread disruption means it may be difficult for the exporter to ship goods in a timely manner. It may also be difficult to forward the Trade Finance documents to the bank. There may be payment delays.
Below are a couple of cases for the purpose of describing the consequences based on the current situation.
A Guarantee issued by a bank in China – advised by Nordea
The first case is a guarantee issued by a bank in China – and advised to the beneficiary via Nordea. In this case, if there is a demand, such must be made to the Guarantor – at the place of issue – on or before expiry. In essence, if it is not possible to present the demand to the guarantor in good time – the demand may be rejected.
If the guarantee is silent as to whether an electronic or paper demand must be made – then a paper demand must be presented.
Export Documentary Credit issued by a bank in China
The second case is a documentary credit issued by a bank in China – and advised to the beneficiary via Nordea (who is the nominated bank).
If a complying presentation is made to the nominated bank (in this case Nordea) – the risk of documents lost or delayed in transit is on the issuing bank
This means that IF a complying presentation is made to the nominated bank (in this case Nordea) the issuing bank must honour it, even if the documents have been lost in transit (or delayed) between the nominated bank and the issuing bank. There may be a problem in forwarding the documents to the issuing bank. Nordea will do its best to agree with the issuing bank on how to solve that.
If the presentation is non-complying, then the risk of getting the documents to the issuing bank is placed on the beneficiary.
If the documentary credit is confirmed by Nordea, a complying presentation to Nordea will obligate Nordea – regardless of whether a Force Majeure is called by the bank in China.
Although technically, at this point in time the situation may not be classed as a Force Majeure, it is still troublesome – to say the least, and of course has consequences.
Kim Sindberg, Executive Adviser to Nordea and Technical Advisor to the ICC Banking Commission
The above are case studies covering some basic transaction scenarios. However, other structures and conditions may provide different results.
Lastly, the coronavirus situation is difficult for all, but there are things that exporters and importers can do to assist the situation and ensure that their position is as strong as possible. Here is a list of some of the issues that could or should be considered:
- Before goods are shipped – connect with your counterpart and carrier to ensure that delivery of the goods is possible.
- For exporters, check carefully the availability of the Documentary Credit and ensure (if possible) that it expires at the counters of your own bank.
- For exporters, ensure that documents presented under a Documentary Credit comply with the terms and conditions.
- For importers, bear in mind that a complying presentation under a Documentary Credit will obligate Nordea, regardless the fate of the goods.
- For guarantee beneficiaries, consider the required content and form of the demand. If there is, or may be, a problem in presenting the demand within guarantee expiry, check if it is possible to amend the guarantee so that it is possible to make an electronic demand. Also, consider if it is possible to extend the validity of the guarantee.
- Under collections, consider if it is possible to get the documents to and between the involved banks.
- Under collections, consider if it is possible to use an “alternative” collecting bank (e.g. the head office of the buyers bank)
The potential problems and remedies will of course depend a lot on the actual case. The intention of the above is to offer general guidance. However, do not hesitate to reach out to your local Trade Finance department should you have questions regarding specific transactions.
Executive Adviser to Nordea and Technical Advisor to the ICC Banking Commission
For more information, please write to Kim Sindberg.
Check out Kim Sindberg’s Trade Finance newsletter here.
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