October 2015 - James D. Hekel, Esq.

Force Majeure: The Longer-Term Effects of the Current Crisis at Nepal’s Borders

force majeure (fors ma-zhər) [Law French “a superior force”] (1883) An event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. • The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars). — Also termed force majesture; vis major; superior force. Cf. act of god; vis major (1). Black’s Law Dictionary (10th ed. 2014).

I will leave to others with more expertise the political intricacies of the current fuel crisis in Nepal. I know that it is not as clear cut as anyone has tried to make it. But I want to speak on one thing I know for sure: the current situation is no longer merely a short-term crisis.

Besides fuel, food, medical supplies for hospitals, and other basic necessities for those, not only in Kathmandu, but–critically–also Nepalis in the areas of Nepal already hardest hit by April’s earthquakes, there are things stuck at the India border and Nepal’s seaport in Kolkata that you cannot put directly into your fuel tank or belly, but will nevertheless have long-lasting consequences for Nepal.

Take, for example, agricultural fertilizers.

The shortage of fuel itself has already affected the price of fruits and vegetables. Without vehicle to transport their goods to market, farmers are forced to sell locally at rock-bottom prices or see their unsold crops rot. Meanwhile, where the highest demand for such goods remains unfulfilled, prices have risen sharply. Listen to Nepali women talk about prices after returning from the market, and you will hear their conversations punctuated by gasps of “Amee!” or “Ram!”

But this is only the beginning.

The fertilizer suppliers’ ships stuck at the port are currently racking up huge demurrage charges. Those ships are not able to offload their goods and be put back into service. These losses they pass back on to the fertilizer suppliers. Even if there were space at the port for storing such goods, the costs associated with long-term storage due to the border disruptions were never anticipated at the time contracts were made for such fertilizers. Hence, the force majeure.

Whether it is the shipper, the shipping company, the buyer, or their insurers that pick up the initial tab, the increased costs will be passed on to (1) those who buy fertilizers, i.e., farmers and eventually (2) those who buy the fruits and vegetables grown using the fertilizer: the Nepali people.

This means that current blockade has already begun to affect next season’s crops. Already high prices will remain high next year or even rise. It may be time to go organic even if not by choice.

In the long run this most affects those least able to pay. And this is what they have to look forward to after surviving this winter without the fuel necessary to carry out the much-needed earthquake relief efforts on their behalf.

(Photo: Andrew Priest)

The Supreme Court of Nepal: Lessons in Litigation

Today, I accompanied three of the litigators from my law firm to the Supreme Court of Nepal. One of our clients’ cases was before a two-justice panel. One of the two is in line for Chief Justice in about two years. The position is decided by seniority in Nepal. I was going to observe.

I went to grab my briefcase as we headed out the door, but founding partner of Gandhi & Associates, Gandhi Pandit, told me there was no need to bring it. It would be too heavy and where we were going was walking distance.

We arrived around 12:30 in the afternoon. Gandhi showed me around. We could not walk more than a few paces without someone recognizing him or him recognizing someone else, so I met a lot of new people, all attorneys.

The building, where the administrative offices and some of the nicer courtrooms were located, had been condemned following April’s earthquakes. The Nepal Bar Association also has a building in the same complex. A few of the administrative offices are temporarily relocated in the ground floor of this building and the top floor is the Bar’s café, where we spent most of our time, waiting and drinking tea and coffee.

We checked the docket sheet outside of our court room shortly after we had arrived. The original cases scheduled for the day were indicated by numbers. There were also several cases shoehorned in front of ours, indicated by letters. The lettered cases seemed to be pending cases left over from before Dashain, the biggest festival in Nepal. Even though our case was the fourth of the day, I soon learned our case would not be argued until 3pm or 3:30pm at the earliest.

So began our first round of tea. Keshab Prasad Mainali, a former chief judge of the various Courts of Appeal and current head of our Litigation Practice Group, grabbed me by the arm as we were about to enter the café and said, “you are about enter our cafeteria,” meaning the lawyers’ café and hangout. It was indeed filled with attorneys. Everyone seemed happy to welcome us and everyone else who walked in and my colleagues, by turn, returned this favor to new entrants as well. We drank tea and ate some chickpea salad and yoghurt. Later we retired downstairs to the courtyard to shoot the breeze and wait some more.

We later went up to the courtroom again to check on the progress of the cases before ours. There was none. As Gandhi and I decided to go back to get some work done at the office during the downtime, we met our client outside of the courtroom. He was very happy to see us. And so began our second, third, and fourth rounds of tea.

I had a chance to chat with our client and met many more attorneys. Our client is an investor, has some relatives in the U.S., and sometimes he visits them in California during Christmas time. One of the more outspoken attorneys seemed very interested to hear what I had to say about current India-Nepal relations, but thankfully Gandhi helped me avoid any potential political faux pas by saying I only give my opinions if I am first paid a fee. I did not argue the point. I later learned that this attorney and another that seemed equally jovial with Gandhi each represented clients who had interests in our case.

We were back in the courtroom when the case before ours began. One of my other colleagues entered our firm’s appearance on behalf of our client. After the previous case came to an end, there was a lengthy discussion over whether there would be enough time to argue our case. It was decided that the case should begin. But after the claims were read before the court and some preliminary matters were addressed, the justices decided to adjourn for the day instead. It became clear that the case was too complex and there were too many interests at stake for so late in the day.

Gandhi explained to me that this is how appellate litigation goes (or does not) in Nepal. Sometimes there is a lot of waiting. Next time I will bring my briefcase.

The UCC Comes to Nepal, Part II

While enacted in 2006, Nepal’s Secured Transaction Act has never been fully implemented. That is about to change this November when the Secured Transaction Registry Office finally comes online (literally: for the first time in Nepal, the people will have free online access to personal property loan records).

This new legal regime presents a lot of new opportunities for those who are ready for it and a lot of new challenges for those who are not. Over the past two weekends, I have been assisting Mr. Gandhi Pandit, the Founding Partner of Gandhi & Associates, and Mr. Raju Man Singh Malla, a former Secretary in the Government of Nepal, in facilitating training seminars on this new law for senior and high level officials working in the credit departments of Nepal’s banking institutions at the National Banking Institute in Kathmandu. Both attorneys were involved with drafting the law and Attorney Malla continues to be instrumental in drafting its regulations.

I will be co-authoring with Attorney Pandit a more detailed analysis of this exciting development in Nepali law and what it means in an upcoming article we are expecting to publish in a local business magazine. In the meantime, below are a few quick points to peak your interest.

The Secured Transactions Act of 2063 is based on U.S. law.

Article 9 of the Uniform Commercial Code (“UCC”), on which the Nepali law is based, was developed during the 1940s in the United States and began to be enacted state-by-state in the 1950s. A uniform system of laws would prove to be crucial to the modernization of interstate commerce in an increasingly connected country, but its initial adoption and eventual success was far from assured at the time.

The U.S. legal system is itself based on the English common law system, where law is made by judges sitting in courts applying legal precedents to the facts before them. This is quite different than a civil law system based on codes like the UCC. What is more is that this law was made in the 1940s, in the midst of World War II, and Germany was a civil law country.

While Pennsylvania and Massachusetts were the first states to adopt Article 9 of the UCC, it was not until New York, the most important jurisdiction for banking, adopted Article 9 that the years of efforts by such legal luminaries as Karl Llewellyn and Grant Gilmore began to bear real fruit. And it took much longer than they had ever imagined.

While there are many protections for creditors inherent in the law, early drafts of the model law also had a lot of protections written in for consumers as well which gave Wall Street some pause. Without support from its banking constituency, the proposed law hit a brick wall in the New York legislature. A long, careful study of the law was undertaken and many compromises were made, but it passed.

Nepal will also face some unique challenges as it implements its own new secured transactions law. But these challenges are necessary for Nepal to take what is a borrowed legal concept and make it its own. Because that is what this is all about.

Secured transactions are for everyone, not just bankers.

Did you read this far without understanding what a “secured transaction” is? With apologies to my friends in the law who recently (or not so recently) survived their bar exams, simply put a secured transaction is a loan backed by collateral.

If you make a loan to someone and want to be sure that they will pay you back, you can ask for more than just their good word. You can agree that something of theirs will be sold to make you whole again if they do not pay you back on their own. Secured transaction law enforces this agreement for you.

And if you get there first, then you can get paid before any one else does. That is the point of the registry system: to let everyone else know that you’ve got dibs (priority).

Small businesses will have access to credit like never before.

Even the drafters of the UCC had no idea the extent of the goldmine they were sitting on. For what was at the time a relatively obscure lending practice, took off in a big way: inventory lending. Growing businesses need working capital if they want to continue to grow and they can get it when they can use their inventory as collateral, both to take out loans from lending institutions, but also to buy new inventory on credit from their suppliers. Coupled with the concept of the “floating lien” (when collateral includes not only what inventory they currently have in stock but future inventory as well), inventory lending went from a mere radar blip to now accounting for as more or more in total loan value than the traditional banks do in the U.S. This could become a game-changer in Nepal as well.

Nepal has at least one distinct advantage over the U.S. in this new law.

Nepal will benefit from having a national registry system. The UCC has been enacted in all 50 United States. That means that the U.S. has at least 50 different personal property securities registries (this number is actually much higher when we take into account “fixtures”). As U.S. citizens and residents are free to shift from state to state, this creates real headaches for lenders.

Nepal will face its own political challenges in regard to its newfound federalism, but thankfully the Secured Transactions Registry will not be one of them.

The Uniform Commercial Code Comes to Nepal

In two month’s time, Nepal will be implementing a new secured transactions legal regime based on Article 9 of the Uniform Commercial Code. This weekend I accompanied two senior partners of my new law firm, Gandhi Pandit, founding partner of Gandhi & Associates, and Raju Man Sing Malla, former Secretary of the Government of Nepal, as they facilitated a program at the National Banking Institute (NBI) of Nepal. The program is designed introduce the Secured Transactions Act, 2063 and its new national registration system to official’s involved in credit and loan transactions in Nepal’s banking and finance institutions. NBI is located in Naxal and, being on the sixth floor, has lovely views of Kathmandu City.