Force Majeure Defenses against a Beneficiary’s Demand under an Independent Guarantee

The most critical point in the Chinese case, Changjiang Geotechnical Engineering Corp. v. China Construction Bank, Wenling Branch[[1]] is that the Supreme People’s Court clarified the issue of whether an issuing bank may invoke a force majeure defense when a beneficiary makes a demand under an independent guarantee.[[2]] In practice, force majeure considerations in independent guarantee transactions may arise on two different levels. First, whether an issuing bank may rely on a force majeure defense that an applicant invokes under the underlying contract as a ground for it to refuse payment of the beneficiary’s demand under the independent guarantee. Second, whether an issuing bank has the right to invoke a force majeure defense that is based solely on the independent guarantee being an independent legal relationship.

In this regard, the International Chamber of Commerce (ICC) has made clear provisions in its Uniform Rules for Demand Guarantees (URDG 758). The relevant provisions of these rules concerning force majeure events under independent guarantees are contained in URDG 758 Article 26. Sub-Article 26(a) states: “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.”