When disruption becomes routine, the absence of rules to manage it turns into a systemic failure. Pandemics, wars and sanctions are no longer outliers; they increasingly define the conditions under which global trade operates. From the Covid pandemic to the Russia-Ukraine conflict, and from Red Sea instability to tensions around the Strait of Hormuz, trade routes are shaped as much by geopolitical risk as by economic logic. What is unfolding is not merely a shift in risk, but a transformation in the functioning of global trade itself.

This shift is evident in the changing role of force majeure. Once a safeguard for exceptional events, it has become a routine instrument of commercial adjustment. Exporters invoke it when shipments are disrupted, while importers use it when payments fail.

The result is a breakdown in which neither delivery nor payment is completed. India’s basmati rice exporters are now facing ₹2,000-25,000 crore in pending payments amid the West Asia conflict. Contracts still exist, but execution is no longer assured.

Force majeure

Consider an Indian basmati rice exporter contracting with a UAE buyer, with payment secured through a Letter of Credit governed by UCP 600 (Uniform Customs and Practice for Documentary Credits, developed by the International Chamber of Commerce). The shipment deadline is April 15; the LC expiry date is April 30. In early April, geopolitical conflict halts vessel movement through the Strait of Hormuz. The exporter’s problem is immediate, but the legal framework governing it is not singular. It is fractured.

The exporter now operates under two legally autonomous but operationally interdependent regimes, and this divergence is the heart of the problem.

The first one is the sales contract. To invoke force majeure, three conditions must be satisfied: the event must be beyond either party’s reasonable control, unforeseeable at the time of signing, and must render performance genuinely impossible. Increased cost or delay alone does not suffice. A vessel rerouted around the Cape of Good Hope, adding 15 days and hefty freight cost, will not ordinarily meet this threshold under contractual force majeure clauses or standard international clauses. The contract technically survives. The exporter bears the additional cost.

If the threshold is met, the exporter notifies the buyer with supporting documentation and seeks an LC amendment extending shipment and expiry dates. This requires the buyer’s cooperation. It is here that the two regimes diverge sharply.

The second regime is Article 36 of UCP 600, which governs the bank’s obligations independently of the sales contract. Article 36 does not require a formal declaration; it applies automatically when the bank’s own business is physically interrupted by war, civil commotion, or acts of terrorism. If the issuing or nominated bank closes due to conflict escalation, it bears no obligation to honour the LC even against fully compliant documents. LC deadlines do not pause.

Upon resumption of business, the bank will not honour a credit that expired during the closure. The exporter loses payment, not because documents were defective, but because the bank was temporarily shut, and this is not an isolated occurrence. Lebanese banks closed during the 2006 conflict. Yemeni banking operations have been repeatedly suspended. In an escalating regional war, bank closure is a plausible next step, not a theoretical one.

Even where banks remain open, as UAE banks have during the current conflict, the exporter is not safe. The payment disruption facing Indian basmati exporters today is not the result of formal force majeure declarations. It is the result of logistics paralysis, frozen payment channels, and sanctions-related banking constraints operating silently below any legal threshold. Banks are withdrawing LC confirmation from high-risk corridors and pricing smaller exporters out of working capital through ordinary commercial risk aversion, without invoking Article 36 at all.

This is the structural trap. Force majeure in the sales contract may excuse the exporter’s delay. Article 36 extinguishes payment when it applies, and institutional risk aversion erodes it even when it does not. In both cases, the burden falls on the exporter.

Limitation of trade finance

This breakdown reflects a structural limitation by design. Trade finance frameworks such as UCP 600 and ISBP (International Standard Banking Practice for the Examination of Documents under Documentary Credits) govern documentary compliance with precision but offer little guidance when compliance is achieved, and performance is nonetheless impossible. The system acknowledges disruption but is not equipped to absorb it. Uncertainty is not managed institutionally; it is transferred to traders.

The consequences are measurable. The global trade finance gap has widened to approximately $2.5 trillion, up from $1.7 trillion in 2020, according to the Asian Development Bank. This does not reflect a shortage of capital. It reflects heightened risk aversion. Even confirmed Letters of Credit have become harder to obtain for exporters in high-risk corridors, as confirming banks withdraw from exposed jurisdictions.

Despite default rates remaining below 0.5 per cent, smaller exporters are increasingly unable to access working capital. As uncertainty rises, capital becomes more selective, and those least equipped to absorb disruption lose access first.

When disruption strikes, it does not remain confined to contractual non-performance. It migrates into the financial system. What begins as a breakdown in physical delivery becomes a breakdown in financial settlement. Standard insurance policies frequently exclude the very events causing the loss, leaving exporters without meaningful coverage precisely when they need it most. No institution manages this transition.

The deeper vulnerability lies in the dollar-centric structure of global trade itself. This framework delivers efficiency under normal conditions, but under disruption, its centralisation amplifies fragility. Liquidity becomes jurisdictionally selective. When dollar-denominated payments are repeatedly delayed, and corridors repeatedly disrupted, diversification away from existing settlement mechanisms ceases to be ideological; it becomes an operational necessity.

Trade frameworks were conceived for episodic shocks, not persistent instability. UCP 600 and the documentary credit architecture remain designed for exceptions, not recurring disruptions. The World Trade Organization remains confined to slow, state-to-state processes, the United Nations Commission on International Trade Law advances harmonisation without enforcement, and the International Chamber of Commerce has yet to adapt to systemic risk.

Trade finance rules must move beyond disclaimers towards mechanisms that absorb disruption — through conditional settlement, coordinated protocols, and credible risk-sharing instruments.

The writer is trade educator and global trade expert

Published on April 23, 2026