Letters of credit (“LCs”) are intended to ensure certainty of payment for trades. But the prominent role that economic and trade sanctions have come to play poses a dilemma for banks seeking to balance this certainty against compliance with sanctions. Even if a sanctions clause referring to foreign sanctions is incorporated into an LC, the question of whether those sanctions have in fact been breached can be a complex question of fact and (potentially, foreign) law. In a judgment handed down recently (Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28), the Singapore Court of Appeal overturned the first decision in Singapore concerning the enforcement of a sanctions clause. In November 2022, the High Court had found that a sanctions clause had been validly incorporated into an LC confirmation, and it allowed the Singapore branch of JPMorgan Chase Bank, N.A. (the “Bank”) to decline payment to the beneficiary. The Court of Appeal upheld the findings on the incorporation of the sanctions clause, but considered that the clause did not justify the Bank’s failure to pay under the LC. The Court found that the Bank’s risk-based decision, preferring to be sued by the beneficiary than be found by OFAC (Office of Foreign Assets Control, the US agency which administers and enforces economic and trade sanctions) to have breached sanctions, was not contractually justified.
Facts
The Bank had confirmed an LC issued in favour of Kuvera Resources Pte Ltd (“Kuvera”). All of the Bank’s advises and the confirmation contained a sanctions clause which (among other things) effectively precluded the Bank from paying if documents presented under the LC involved a vessel subject to US sanctions. Kuvera made a presentation under the confirmed LC concerning a cargo that was carried onboard the Omnia. During an internal sanctions screening, the vessel showed up in the Bank’s internal ‘Master List’ of entities and vessels determined to have a sanctions nexus. Whilst the Bank was unable to identify the beneficial owners of the Omnia, it relied on certain red flags concerning the vessel’s ownership. In particular, the vessel was previously called the Lady Mona, and its beneficial owners and technical operator had Syrian links. After her name changed and she got a new registered owner, it became impossible to ascertain the beneficial owners of the vessel or her technical and ISM managers. OFAC had also issued guidelines and advisories placing US persons on notice of deceptive shipping practices undertaken to evade US sanctions. These practices included changing the names and registered owners of vessels, and using layered ownership structures to mask the fact that the ultimate or beneficial ownership of the vessels rested with sanctioned entities. OFAC specifically identified changing vessel names as a common evasive practice in relation to vessels owned by Syrian entities. The Bank led uncontradicted expert evidence (Kuvera not having led any expert evidence) that OFAC would have found a breach of US Syrian sanctions if the Bank made payment under the LC in respect of a cargo carried on the Omnia in the circumstances.
Finding
At first instance, the High Court found that OFAC would have found that payment under the confirmed LC would amount to a breach of sanctions. In any event, the court was also independently satisfied that paying Kuvera would have amounted to a breach of sanctions.
On appeal, the Court of Appeal held that the enquiry of whether a vessel is subject to any applicable restriction should be determined on an objective basis without any third-party input from entities such as OFAC. An approach entailing an extrapolation of findings that OFAC might arrive at had an element of speculation and arbitrariness, which would render it impossible for beneficiary of LC to know with certainty whether it would be paid notwithstanding a compliant presentation. In this regard, the court highlighted that while the court had to approach the question of the vessel’s ownership on a balance of probabilities (requiring a more than 50% chance of a Syrian connection), OFAC was not constrained by similar rules of evidence. The Bank’s exchanges with OFAC seeking its opinion on the matter were not given weight for the added reason that they demonstrated that the Bank was retrospectively looking to OFAC to justify its decision. The court also found it relevant that the Bank had taken a decision on its own risk assessment, preferring to be sued by Kuvera than being found by OFAC to have breached sanctions, without having objectively assessed the likelihood of the vessel having Syrian connections.
The key question before the Court was whether the Omnia under her new registered ownership remained under Syrian beneficial ownership in 2019? The Court emphasised that the Bank continued to bear the burden of showing that she remained Syrian-owned notwithstanding the change in her registered ownership. The vessel’s new registered owner was a Barbados entity, and her technical and ISM manager a UAE entity. The fact that the Bank did not have control of or access to sale and transfer documents pertaining to the vessel did not displace its burden of proving on a balance of probabilities that the Omnia remained Syrian-owned.
The Court found that the Bank had not displaced the prima facie inference of ownership arising from a registered non-Syrian owner. It was not sufficient to suggest that just because information on her beneficial owner or the beneficial owners of her technical and ISM manager was not available, it must follow that there is some masking or concealment of beneficial ownership. The suggestion that a registered owner may be a shell company was inconclusive.
Comment
Certainty of payment continues to be a guiding touchstone and a bank seeking to withhold payment on account of sanctions would have to objectively show how the payment constitutes a breach of the applicable sanctions. It is clear that a subjective assessment by a bank through its own risk assessment is not sufficient (e.g., a decision justified by a preference to be sued by the beneficiary than being penalised by OFAC).
Such subjective assessments would indeed render an LC payment unpredictable. A sanctions clause pegged to an objective and identifiable set of laws which apply to the bank would be more certain, but would still erode some of the commercial certainty that LCs offer. This is because a breach of sanctions is not always clear-cut. Barring the unlikely instance of a decision from the courts of the relevant jurisdiction on the sanctions in question and on similar facts, questions of interpretation of the sanctions and their application to the facts are bound to arise. Whether foreign sanctions are in fact breached can be a thorny question of applying the relevant sanctions laws to the facts.
The Court of Appeal here effectively concluded that America’s sanctions on Syria were not breached as the Omnia’s Syrian connections had not been established on a balance of probabilities. In reaching the conclusion, the Court disregarded the conclusion that OFAC would have reached and OFAC’s advisories / guidelines on the practices of masking beneficial ownership of vessels. It appears that parties did not make submissions on the weight (if any) that an American court would have given to the views of OFAC or its advisories. In our view, if an American court would have accorded deference to the views of the OFAC or regarded breaches of its advisories as relevant, those factors should not be completely irrelevant to a foreign court’s assessment of breach of American sanctions. As matters stand, banks here have a high hurdle to cross before withholding payment on account of American sanctions even if those sanctions apply by virtue of a sanctions clause in an LC. Of note, OFAC’s guidelines and advisories may not carry any weight in the assessment of whether US sanctions have been breached, and banks have to establish a breach independently on a balance of probabilities.
