Effects of Banking Sanctions as Force Majeure on Legal Regime of Issuing of Letter of Credits

دانشنامه حقوق اقتصادی

Article 6, Volume 22, Issue 8, January 2016, Pages 124-145   

Document Type: Scientific research

DOI: 10.22067/le.v22i8.57063

Authors

Seyed Yaser Ziaee¹; Mahdi Telba^{* 2}

¹University of Qom

²Shahed university

Abstract

International trade relations in the contemporary international environment is essential. Security and speed in the trade relations plays an important role in its success. International trade legal system is a special place to regulate transboundary relations between international traders. This legal regime must respond to emerging issues in international trade relations. Payments is one of the most important issues in international trades which should be regulated by the legal regime. One of the common and regular methods in international payments is opening of letters of credit which are done by banks of origin state and destination state. The documentary credit is the most common payment method in international agreements. This method of payment makes payments secure through financial guarantee of contracts by a third party. However, the principle of irrevocability in the letter of credit largely assures payments, but some events could impair the function of the bank. Among them, force majeure is a usual and possible execution which can make issuing banks unable to do their function well. This execution is referred to as Uniform Customs and Practice for Documentary Credit (UCP 600) which has been approved by the International Chamber of Commerce. Force majeure in brief can be defined as unpredictable and uncontrollable and out of intention of the adducer. Force majeure makes execution of the contract impossible and may cause suspension or termination of the transaction.
In recent years, among the cases of force majeure, economic sanctions and specifically banking sanctions have been applied against some countries including Islamic Republic of Iran that have prevented from flow of international financial trade as fast and secure. Although article 36 UCP 600, which include instances of force majeure, hasn't mentioned to economic sanctions, these instances are not limited, because it noted to "or for any other reason" as one of instances of force majeure. Banking sanction as a unpredictable, inevitable and out of intention event, which can be introduced as a force majeure, causes to preclude responsibility of the banks and corporations which their state are under sanction. However, it is necessary to distinguish between the types of sanctions: mandatory sanctions and voluntary sanctions. While the banking sanctions by the Security Council of UN may suspend implementation of the grant of credit by banks, voluntary sanctions, such as secondary sanctions by the United States of America against Iran and Cuba, cannot be invoked as a force majeure. As well, sanctions that are applied by the bank itself are not an instance of force majeure, unless a pre-condition has been stipulated for sanctions in the contract for issuing of letters of credit.
This study attempted to examine the relationship between banking sanctions and force majeure and to evaluate effect of bank sanctions on the obligations arising from the issuing of letters of credit. By examining this issue, we can present solutions for facilitating the international trade, particularly transactions within the scope of the Islamic Republic of Iran as one of the countries that is subject to international sanctions. For this purpose, in this study, library study has been used to collect data and Descriptive- Analytical method has been adopted to provide appropriate solutions. Suggestions in this regard are as follows:
A) The beneficiaries request from other party to guarantee the credit. Confirmation is used in the event that, for any reason, vendors believe that the bank’s commitments are not enough for issuing letter of credits and so demands other party to attach its bank credit to another bank approval -preferably from another country. In this way, beneficiaries would be sure before shipping goods on the board. In such cases, the confirming bank with approving the credit, has an independent obligation to the issuing bank in favor of the beneficiary. In other words, an independent contract between the confirming bank and the beneficiary would exist. B) In contract, parties predict the possibility of transforming the obligation of the issuing bank of letter of credit to a third party. This means that at the request of the beneficiary, the commitment of the bank should be exercised in favor of someone else. Whereas sanctions are primarily against a state and its citizens, commitments could be done in favor of other banks or companies. In other words, if issuing bank of letters of credit in relation to trade with the bank A from country A has applied bank sanctions against that bank, issuing bank can exercise its commitment in favor of Bank B from country B. C) This clause inserted in the contract for opening letters of credit that committed even in case of force majeure will be responsible or in cases of hardship parties are required to solve their dispute through the payment of adequate compensation. D) If the possibility of imposing binding economic sanctions on issuing banks is weak, the applicant and the beneficiary and issuing bank ought to avoid from acceptance of the voluntary sanctions clause. E) The applicant and the beneficiary of credit should refrain from the opening of letters of credit in the bank which are likely to be sanctioned in the future.

Keywords

letter of credit; issuing bank; force majeure; economic sanction; banking sanction

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