By: Tim Staheli
For many of us, force majeure was an expensive phrase we picked up during the pandemic. It was the reason the wedding venue kept the deposit, and the holiday came back as a voucher: the clause that lets one side stop delivering when events beyond its control intervene.
Six years on, the same two words are arriving by formal notice across the Gulf, from some of the world’s largest energy producers, over cargoes their customers have already arranged to pay for. This time the payments run through an instrument that was designed, quite deliberately, not to care.
The Iran war reached the region’s export infrastructure in early March. QatarEnergy moved first, declaring force majeure on its LNG exports on 4 March after strikes disabled part of its export capacity. Kuwait Petroleum Corporation followed on 7 March. Bahrain’s Bapco Energies came next, on 9 March, after a direct hit on its refinery complex, and Iraq declared on 20 March, covering every foreign-operated oilfield in the country.
Shell, cut off from the Qatari cargoes it had contracted to deliver onward, declared force majeure to its own LNG customers within the week. Norsk Hydro, part-owner of the Qatalum smelter, cut aluminium production. So did Aluminium Bahrain and Oman’s OQ. India invoked emergency measures to redirect gas to priority users. A declaration made in Doha on a Wednesday had, by the following one, worked its way through smelters, utilities and trading books on three continents. Force majeure, it turns out, is contagious.
The credit does nothing, on purpose
Every interrupted trade has money attached: payment obligations, financing lines and, in a great many cases, a letter of credit – the bank’s undertaking to pay the seller once the shipping documents arrive. The contract has stopped. What does the credit do?
By late March the questions were stacking up. Vincent O’Brien, director of ICC United Arab Emirates, said the trading community wanted to know what now counted as a “war zone”, whether stranded goods triggered force majeure – and, underneath it all, whether the rules underpinning trillions of dollars in trade finance would hold. The ICC, whose rulebook governs most of the world’s documentary credits, answered on 20 April. “The positive message was clear,” O’Brien said. “Even in times of severe disruption, the ICC rules governing trade finance instruments remain stable and continue to provide certainty to the global trading community.” Force majeure does feature in the ICC rules – referenced at article 36 of UCP 600, the framework under which close to 100 per cent of commercial letters of credit are issued – but it protects one party only: the bank, and only when the bank itself cannot operate, its offices shut, its business interrupted by the same category of disaster that stopped the cargoes.
Vincent O’Brien, director of ICC United Arab Emirates
A seller who cannot ship has no claim on it – “no goods, no shipment, no documents, no money,” O’Brien said. A buyer whose contract has been suspended has no claim on it either: when it comes to triggering the bank’s payment obligation, “banks are in no way concerned with or bound by such contracts”. The contractual declarations that swept through the LNG market in March, the guidance confirms, have no effect whatsoever on the commercial letters of credit that finance those trades.
A letter of credit is deliberately deaf to the contract it supports: the bank promises to pay against documents – the bill of lading, the invoice, the certificate of origin, whatever else the credit specifies – and concerns itself with nothing else. Not the war, not the contract, not whether the goods ever arrived at the port of destination. If the documents are presented and comply, the bank pays, force majeure or no force majeure. If the shipment never happens, no documents are presented, and the credit simply expires, unpaid and unbothered, when its term runs out. The instrument neither pays nor excuses. It waits.
Follow one cargo through the machinery and the design shows itself. Take a utility in Osaka with a credit issued by its bank, confirmed in Doha, covering an LNG shipment due to load in late March. The declaration lands; the tanker never sails. Nothing happens to the credit – nothing can. The seller has no documents to present, so no payment falls due. The buyer cannot cancel the credit because it is irrevocable; it simply sits as an unclaimed promise until its expiry date in the summer.
Meanwhile a sister cargo that loaded on 2 March, two days before the declaration, sails on: its bill of lading is clean, its documents comply, and the bank pays in full while the war escalates on the news. Two cargoes, opposite outcomes – and at no point did anyone at the bank exercise a moment’s judgement about the war.
The hypothetical has already been tested, from an unexpected direction. O’Brien describes a confirming bank that tried to use force majeure to escape its own undertaking once the declarations began. Article 36 gave it nothing. “There was no disruption resulting in an interruption to the confirming bank’s business, and the European exporter had made a complying presentation,” O’Brien said. “The bank remained obligated to honour the payment – regardless of the delays affecting the shipment’s arrival.” The one party the clause ended up protecting was the exporter – aptly labelled, in letter of credit definitions, “the beneficiary”.
Billions of dollars change hands this way every day, from banks to exporters, on the strength of a few pieces of presented paper – and the bank is not allowed to dawdle over the decision: “a maximum of five banking days following the day of presentation, as articulated in UCP 600 sub-article 14(b),” O’Brien said.
The courts have defended the waiting for decades. Much of this business is written under English law, and English judges have refused to interfere with payment under a credit in all but the rarest cases, fraud chief among them – irrevocable bank obligations being, in Mr Justice Kerr’s phrase from the Harbottle case in 1978, “the life-blood of international commerce”. Force majeure is not fraud. A buyer asking a court to stop its bank paying because the underlying contract has been suspended would find fifty years of authority facing the other way.
For the banks, the guidance offers housekeeping rather than shelter. A bank nominated to act in a letter of credit is not liable for documents delayed or lost in transit – a live concern where couriers no longer serve the Gulf – and the parties may agree to scanned or electronic presentation where the paper cannot move. The ICC points to its electronic supplements, eUCP and eURC, written years ago for exactly this contingency and, until now, more admired than used. O’Brien is careful about how far the workaround goes. “Whether that information exists on paper or electronically, the underlying data and information value remains the same,” he said – but documentary credits are stricter: under UCP 600, at least one original of each stipulated document must be presented unless the credit says otherwise. Electronic copies can sharpen everyone’s decisions while the paper is stuck. What they cannot do, in most credits, is enforce payment.
The war has been an education in small print well beyond the credit. O’Brien recalls a buyer who had agreed to “payment on delivery” under CFR terms before the conflict – and then discovered that, under CFR, contractual delivery happens when the goods go on board at the load port, not when they arrive. The cargo could sit stranded mid-ocean and payment still fell due, because in the paper world the delivery had already happened, as evidenced by the shipped-on-board bill of lading. The rules do not read the news; they read the terms.
The deafness serves everyone
It is worth being precise about who this arrangement serves, because the answer is everyone. Once a credit is issued as an authenticated teletransmission, the seller has in hand an operative, independent payment undertaking of the bank. The seller whose contract becomes suspended still holds that irrevocable promise for anything already shipped, whatever happens to the buyer, the buyer’s country or the buyer’s willingness to pay. The buyer knows the bank releases nothing until documents evidence that the goods moved. And the banks in the middle price and process paper, a business they can conduct from Frankfurt or Singapore while the underlying cargo sits in a war zone. The credit’s refusal to look at the world is what lets everyone else keep trading in it.
The economics bear this out. Research from the Federal Reserve Bank of New York found that a one-standard-deviation negative shock to a country’s supply of letters of credit cuts that country’s exports by 1.5 percentage points on average, and that the effect more than doubles during crises. LC supply is not plumbing; it is a variable that moves trade itself, and it moves it most in precisely the conditions the Gulf now presents. When risk rises, the availability of the instrument that neutralises risk starts deciding which trades happen at all.
The calm expires
So far, the strain has stayed out of public view. Nobody has yet gone to court over a credit caught in the March declarations, and the ICC has not had to say anything since April. But this is a lull, and lulls end on a schedule here: the credits written against spring cargoes expire over the summer and autumn, and expiry is where the war finally enters the machinery. A seller whose vessel cannot move loses nothing to the clause and everything to the calendar: if the credit expires before a complying presentation can be made, the payment it promised lapses with it. A bank asked to reissue, extend or confirm against a Gulf counterparty in October is pricing the conflict in a way no force majeure notice could force it to. That is when the Fed’s finding starts to bite. Nothing happens to the old credits; the question is whether banks will write the new ones. Banks that make their fees by saying yes can, in troubled times, remember how to say no.
The rulebook expects trouble
The ICC has been here before. The rulebook itself was born in a crisis of trust: the ICC first codified letter of credit practice in 1933, in the trough of the Depression, when banks on opposite sides of the Atlantic had stopped believing one another’s paperwork, and UCP 600, the current edition, is the sixth revision of a document written for a world already going wrong. The ICC issued much the same guidance in 2020, when the pandemic grounded the couriers, and in 2010, when the volcano Eyjafjallajökull grounded the aircraft carrying the world’s bills of lading. This one, O’Brien said, has its own texture – war-risk insurance costs jumped, cover thinned, and shipping routes had to be redrawn at speed – but the rules held, as they were built to.
“The lesson from recent disruptions is clear,” he said. “Resilience comes not only from strong rules, but from the ability to modernise, adapt and embrace digital solutions.” Pandemic, volcano, war: the rulebook’s answer does not change, because the rulebook was written on the assumption that something, somewhere, is always going wrong. An instrument that survives four centuries of shipwreck, revolution and default does so by refusing, politely and absolutely, to take an interest.
The notices from the Gulf said the goods are not coming. The credits behind those trades have their own reply: present the documents, or wait. It is not much of a conversation. That is rather the point.
