Module: | MODULE A: INTERNATIONAL BANKING
Q90: Consider the following statements regarding the concept of Force Majeure in documentary credit operations:
Statement 1: Banks assume no liability or responsibility for the consequences arising out of the interruption of their business by acts of God, riots, civil commotions, or strikes.
Statement 2: If a Letter of Credit expires while the receiving bank is closed due to a force majeure event, the bank will automatically extend the expiry date for the beneficiary once the bank reopens.
Statement 3: Upon resuming normal business operations, a bank will honor or negotiate a presentation that was delayed solely because the bank was closed during the force majeure event.
Statement 2: If a Letter of Credit expires while the receiving bank is closed due to a force majeure event, the bank will automatically extend the expiry date for the beneficiary once the bank reopens.
Statement 3: Upon resuming normal business operations, a bank will honor or negotiate a presentation that was delayed solely because the bank was closed during the force majeure event.
✅ Correct Answer: A
The correct option is A. Only 1 is correct.
Concept Definition: Force Majeure is a standard legal clause that frees both parties from liability or obligation when an extraordinary event or circumstance beyond their control prevents one or both parties from fulfilling their contractual duties.
Structural Breakdown: In international trade finance, this concept applies specifically to the physical operational capability of the banks involved.
It covers severe disruptions such as natural disasters, wars, acts of terrorism, and widespread industrial strikes.
Historical/Related Context: Article 36 of the standard regulatory framework is notoriously strict.
Unlike some general commercial contracts that simply pause obligations during a temporary emergency, the international banking rules heavily favor the financial protection of the banks over the beneficiary.
Causal Reasoning: Statement 1 is correct as it is a direct quotation of the core principle of Article 36, absolutely absolving banks of liability during such events.
Statement 2 is incorrect.
The rules explicitly state that banks will not extend the expiry date or the latest date for presentation for a credit that expired during the interruption of their business.
Statement 3 is also incorrect.
Because the expiry date is not legally extended, the bank will not honor or negotiate documents presented after it reopens if the original expiry date has already passed.
The seller bears the ultimate risk of the bank being closed due to an emergency.
Concept Definition: Force Majeure is a standard legal clause that frees both parties from liability or obligation when an extraordinary event or circumstance beyond their control prevents one or both parties from fulfilling their contractual duties.
Structural Breakdown: In international trade finance, this concept applies specifically to the physical operational capability of the banks involved.
It covers severe disruptions such as natural disasters, wars, acts of terrorism, and widespread industrial strikes.
Historical/Related Context: Article 36 of the standard regulatory framework is notoriously strict.
Unlike some general commercial contracts that simply pause obligations during a temporary emergency, the international banking rules heavily favor the financial protection of the banks over the beneficiary.
Causal Reasoning: Statement 1 is correct as it is a direct quotation of the core principle of Article 36, absolutely absolving banks of liability during such events.
Statement 2 is incorrect.
The rules explicitly state that banks will not extend the expiry date or the latest date for presentation for a credit that expired during the interruption of their business.
Statement 3 is also incorrect.
Because the expiry date is not legally extended, the bank will not honor or negotiate documents presented after it reopens if the original expiry date has already passed.
The seller bears the ultimate risk of the bank being closed due to an emergency.