Key points

Under English law, in the current circumstances, or if the current situation significantly deteriorates:

  • it is very unlikely that most COVID-19 (C-19) related events would frustrate an English law governed primary and autonomous letter of credit (LC) or demand guarantee (each, a Relevant Instrument) or an English law governed bill of exchange (bill) or promissory note (note) (each, a Negotiable Instrument);
  • it is extremely unlikely indeed that an English court would imply a force majeure term into a Relevant Instrument or a Negotiable Instrument;
  • except in the case of specific, narrow articles of UCP600, ISP98 or URDG758 (or certain other ICC rules) when applicable, only in exceptionally rare cases would a mainstream English law Relevant Instrument contain an express force majeure term;
  • where an English law Relevant Instrument did contain a force majeure clause, whether that clause was triggered, and its effects when triggered, would always depend on the specific drafting and facts of each case;
  • some Relevant Instruments (particularly documentary credits) will not have governing law or jurisdiction clauses and might be governed by the laws of, or subject to the jurisdiction of courts in, countries whose laws (in effect):
  • in the case of Relevant Instruments that are governed by English law (and particularly when expressly subject to UCP600, ISP98 or URDG758), the autonomy principle means that an issuing, confirming or nominated bank (each a Letter of Credit Bank) is not concerned with whether any underlying transaction is affected by force majeure, frustration or similar doctrines, rules or principles. When considering whether a presentation of documents is compliant, Letter of Credit Banks deal on documents only, not in goods, services or disputes about underlying transactions;
  • broadly, where a financier discounts a Negotiable Instrument as a holder in due course, or by purchasing that Negotiable Instrument from a holder in due course, it can usually assume that its claim against the acceptor or maker of the Negotiable Instrument will be free from concerns about C-19 related frustration or force majeure issues; and
  • broadly, where a financier holds a Negotiable Instrument as its named payee, C-19 related events might sometimes lead that financier to breach the underlying transaction under which it received the Negotiable Instrument in question. Where such a breach caused a total failure of consideration, or a partial liquidated failure of consideration, under the underlying transaction, this could affect the financier's ability to claim full payment from the Negotiable Instrument's acceptor or maker at maturity.

Further detail on selected key points

Frustration 

A party might be excused from performing its obligations under an English law contract if the agreement is frustrated. Frustration of a contract will only occur if:

  • a change in circumstances has occurred;
  • the change was outside the parties' control;
  • the contract does not provide for the changed circumstances;
  • the change was not within the parties’ contemplation when they made the contract; and
  • as a result of the change, it would be unlawful or impossible to perform the contract in accordance with its terms, or performance would be radically different from that contemplated by the parties when they made the contract.

This is a very high bar indeed. "Impossible" does not mean much more difficult or much more expensive. The fact that C-19 caused an entity's business to suffer significantly would not by itself frustrate a Relevant Instrument or Negotiable Instrument issued by that entity.

UCP, ISP and URDG

UCP

Article 36 UCP600 is protective of Letter of Credit Banks as it provides these two protections:

"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.

A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruptions of its business".

Note that, in our view, the second limb of article 36 (quoted above) does not impose a time limit on a confirming bank or nominated bank that has honoured or negotiated an apparently complying presentation for putting in its claim for reimbursement.

Articles 35 and 37 UCP600 might also assist a Letter of Credit Bank facing C-19 related disruption. Relevant extracts from these articles are set out below.

Article 35 

"A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the credit.

If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank ..."

Article 36 

"a. A bank utilizing the services of another bank for the purpose of giving effect to the instructions of the applicant does so for the account and at the risk of the applicant.

b. An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank ...

d. The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages".

ISP

Notoriously, article 3.14 ISP98 is unhelpful to Letter of Credit Banks as it provides (in part):

"(a) If on the last business day for presentation the place for presentation stated in a standby is for any reason closed and presentation is not timely made because of the closure, 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, unless the standby otherwise provides".

Similarly unhelpful to Letter of Credit Banks in the C-19 context is article 5.03 ISP98, which provides:

"(a) Failure to give notice of a discrepancy in a notice of dishonour within the time and by the means specified in the standby or these rules precludes assertion of that discrepancy in any document containing the discrepancy that is retained or represented, but does not preclude assertion of that discrepancy in any different presentation under the same or a separate standby.

(b) Failure to give notice of dishonour or acceptance or acknowledgment that a deferred payment undertaking has been incurred obligates the issuer to pay at maturity".

 

URDG

Article 26 URDG deals with force majeure in a broadly similar way to ISP98, but in much greater detail.

Article 26

"(a) In this article, "force majeure" means acts of God, riots, civil commotions, insurrections, wars, acts of terrorism or any causes beyond the control of the guarantor or counter-guarantor that interrupt its business as it relates to acts of a kind subject to these rules.

(b) Should the guarantee expire at a time when presentation or payment under that guarantee is prevented by force majeure:

(i) each of the guarantee and any counter-guarantee 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 or, in the case of a counter-guarantee, the counter-guarantor of the force majeure and the extension, and the counter-guarantor shall so inform the instructing party;

(ii) the running of the time for examination under article 20 of a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the guarantor's business; and

(iii) a complying demand under the guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that guarantee has expired, and in this situation the guarantor shall be entitled to present a demand under the counter-guarantee within 30 calendar days after cessation of the force majeure even if the counter-guarantee has expired.

(c) Should the counter-guarantee expire at a time when presentation or payment under that counter-guarantee is prevented by force majeure:

(i) the counter-guarantee shall be extended for a period of 30 calendar days from the date on which the counter-guarantor informs the guarantor of the cessation of the force majeure. The counter-guarantor shall then inform the instructing party of the force majeure and the extension;

(ii) the running of the time for examination under article 20 of a presentation made but not yet examined before the force majeure shall be suspended until the resumption of the counter-guarantor's business; and

(iii) a complying demand under the counter-guarantee presented before the force majeure but not paid because of the force majeure shall be paid when the force majeure ceases even if that counter-guarantee has expired.

(d) The instructing party shall be bound by any extension, suspension or payment under this article.

(e) The guarantor and the counter-guarantor assume no further liability for the consequences of the force majeure."

Articles 28(a) and 29 of URDG758 might sometimes assist a bank providing a demand guarantee or counter-guarantee subject to those rules should it face C-19-related disruption to its or its agent's operations. These articles respectively read as follows.

Article 28(a)

"(a) The guarantor assumes no liability or responsibility for the consequences of delay, loss in transit, mutilation or other errors arising in the transmission of any document, if that document is transmitted or sent according to the requirements stated in the guarantee, or when the guarantor may have taken the initiative in the choice of the delivery service in the absence of instructions to that effect."

Article 29 

"A guarantor using the services of another party for the purpose of giving effect to the instructions of an instructing party or counter-guarantor does so for the account and at the risk of that instructing party or counter-guarantor."

However, article 30 URDG provides that: "Articles 27 to 29 shall not exempt a guarantor from liability or responsibility for its failure to act in good faith".