America has one of the most wide-ranging sanctions regimes, which in some cases are also designed to have extra-territorial reach on non-US persons. Singapore does not implement US sanctions as local law, so, a breach of US sanctions is not immediately unlawful as a matter of Singapore law. That said, American sanctions have led parties to contest performance of their contractual obligations outside of the US as well, which has created fertile ground for litigation. The effect of sanctions is felt on various actors in international trade, impacting traders, charterers, ship owners and financing banks. The marketplace has had to navigate the evolving sanctions landscape, the legal effect of self-sanctioning and novel cases in understanding whether an obligation can be excused by sanctions. In Part 1, we cover lessons from recent cases in Singapore and UK on the impact of US sanctions on the performance of payment obligations under letters of credit used in international trade.
Confirming Bank resisting payment on account of sanctions clause in confirmation
Sanctions clauses are now commonplace in the myriad of international trade and finance documents. But how does sanctions apply in the web of contracts in a letter of credit scenario where issuing banks and confirming banks might be in different jurisdictions with different contractual restrictions on sanctions. A test case for considering the validity and enforceability of a sanctions clause in a confirmed letter of credit (“LC”) came before the Singapore High Court last year. In Kuvera Resources Pte Ltd v JPMorgan Chase Bank, NA  SGHC 213, a Singapore branch of the American bank, JP Morgan bank had confirmed an LC issued to Kuvera, with the confirmation being governed by Singapore laws. All the advises and confirmations from JP Morgan contained a sanctions clause, which (among other things) effectively precluded the bank from paying if documents presented under LC involved a vessel subject to US sanctions. In addition to US sanctions, the sanctions clause also required compliance with sanctions of “all applicable jurisdictions” to the extent they did not conflict with US sanctions.
In this case, JP Morgan, as the confirming bank, declined to pay against a compliant presentation by Kuvera because its sanctions screening revealed that the cargo in question was carried on a vessel which was likely beneficially owned by a Syrian entity and fell within the scope of US sanctions on Syria. The question that the court had to decide was whether JP Morgan was entitled to refuse payment on account of its sanctions clause in the confirmation, even though the LC by the issuing bank did not contain such a sanctions clause.
The court determined a number of issues in this case in upholding JP Morgan’s decision to not pay, including the following:
- There is no impediment to a confirming bank incorporating a sanctions clause as a term of a confirmation even if the LC from the issuing bank did not contain one.
- Caution must be had with regard to sanctions clauses that are so broad and vague as to affect the effective functioning of an LC. The sanctions clause on the facts of this case was not fundamentally inconsistent with the commercial purpose of the LC confirmation (e., providing the beneficiary with an alternate paymaster). A clause would be fundamentally inconsistent in this sense if it renders a confirmed LC an unconfirmed LC. e.g., by entitling a confirming bank to not pay until it is reimbursed by the issuing bank.
- In this case, the clause was not so wide as to render the LC confirmation effectively revokable, as it did not go beyond US regulatory obligations imposed on the bank; and the phrase “other applicable jurisdictions” was found to mean sanctions laws other than US sanctions laws which applied to the bank branch which confirmed the LC. The court contrasted this with a sanctions clause which allowed a bank to decline payment on the (broad) basis of its internal sanctions policies.
- Based on the evidence of the bank’s US sanctions expert, the court was satisfied that payment under the LC would breach the relevant Syrian sanctions. Of practical relevance, the court considered that ‘all sanctions laws and regulations’ of the US also included guidelines from the US regulator, OFAC, expects US persons to adhere to. This included general due diligence guidelines, and awareness of deceptive practices in the shipping industry which OFAC has highlighted in its advisories, g., practices such as changing vessel names and ownership, and using layered ownership structures to mask the fact that the true UBO is a sanctioned entity.
Confirming Bank resisting payment on account of USD bank transfer through correspondent bank
Another recent case where a bank tried to resist payments under LCs on grounds of US sanctions (but without luck) is the English High Court decision of Celestial Aviation Services Limited v UniCredit Bank AG  EWHC 663 (Comm). The facts and findings were varied, but for this update we will focus on the issue of the confirming bank (which was the London branch of the German bank, UniCredit) declining payment on the basis that US laws prevented it from making payment notwithstanding that the LCs were governed by English law. US sanctions were said to be engaged because payment under the LCs was required to be made in USD. UniCredit argued that payment via a correspondent bank in New York would be illegal in the place of performance, being the US. The English High Court rejected this argument. Following an earlier decision of Libyan Arab Foreign Bank v Bankers Trust  1 QB 728, the court found that where a contract requires payment in dollars, the beneficiary is entitled to demand payment in cash. This is so whether the demand involved an unlikely situation, e.g., payment of a very large sum of money. The court noted that the terms of LCs did not preclude payment by cash; and while the LCs anticipated payment by correspondent bank, that did not mean that a bank is entitled to insist on making payment that way, even if such a payment cannot be made or lawfully made.
UniCredit further argued that the Libyan Arab case had turned on the fact that a demand there had been made for payment in cash, whereas here no such demand was made in this case, at least at the outset. The court also rejected this argument, and held that this is to confuse the trigger for the obligation (the demand) with the manner in which that obligation (to make payment) may have to be fulfilled. It may be that the demand made upon UniCredit assumed that payment would be made through a correspondent bank. However, that did not mean that UniCredit could not choose to perform in any other way, including via the tender of cash. Where the fundamental obligation is to make payment, and where it is possible to make such payment, then the bank must do so.
Sanctions Guidance: Are Your Hands Tied?
Every bank (and most parties) would invariably be concerned with sanctions and their implications on the performance of contracts. In the banking world, the web of contracts between issuing and confirming banks located in different jurisdictions might create differing risks and restrictions with respect to sanctions. To excuse performance on account of foreign sanctions, it would always be prudent for a bank to expressly state so. A confirming bank might wish to limit its liability by incorporating a sanction clause even where the issuing bank’s LC does not contain one, but the key to such incorporation is to be clear and precise to as specific sanctions applicable. Such a clause cannot be too wide or subjectively defined, so as to be incompatible with irrevocable nature of LCs.