Documentary Credit World

In the November/December 2023 issue of Documentary Credit World, there is an interesting piece of the Litigation Digest summary of the Singapore Court of Appeal case of Kureva Resources Pte Ltd v. JPMorgan Chase Bank N.A. It was about the Confirming Bank’s refusal to pay the Beneficiary on an otherwise complying presentation on grounds relating to US sanctions. Beneficiary sued Confirming Bank for wrongful dishonor, alleging breach of contract. The trial court in Singapore ruled in favour of Confirming Bank, which was subsequently reversed by the appellate court.

Whilst the case involves the Confirming Bank incorporating a sanctions clause (the Sanctions Clause) in its confirmation of a UCP600 documentary credit, as well as issues regarding the exercising of the Sanctions Clause in the dishonor of an otherwise complying presentation, the case offers some valuable insights for the trade finance community, including banks as well as beneficiaries.

(A) With respect to the Confirming Bank incorporating the Sanctions Clause in its confirmation and the Sanctions Clause itself, there are a few points to highlight from this particular case:

1. First of all, the trial court found that the Sanctions Clause had been duly incorporated as a contractual term of the confirmation, that there was no legal impediment to a confirming bank adding a term to its confirmation of a credit that was not in the credit itself, as long as the term was not fundamentally inconsistent with the commercial purpose of the confirmation.

Reading this literally, it seems to suggest that a confirming bank may add its own terms to a confirmation, as long as the added terms are not fundamentally inconsistent with the commercial purpose of the confirmation, which is to give the beneficiary an alternative paymaster other than the issuing bank. Therefore, for instance, can a confirming bank impose a term restricting the choice of language of the documents to be presented, even when the credit is silent in that respect? I think the answer is negative, as it is not complying with the UCP 600 subject to which the credit was issued. Thus, in such situation where a confirming bank wishes to restrict the choice of language of the documents (e.g., documents must be presented in English only), an amendment to the credit is required.

What is the difference between adding a sanctions clause and adding a term to a confirmation that was not in the credit itself? The difference lies in the fact that, in the words of an ICC guidance paper,:₁ “[S]anctions laws and regulations are generally considered as being mandatory and thus may override the ICC rules applicable to that instrument and, more generally, the contractual terms of the instrument.”

2. The trial court found that the Sanctions Clause was valid and enforceable as it was not fundamentally inconsistent with the commercial purpose of a confirmation and it was narrowly worded so as not to confer on Confirming Bank broad discretion to escape its contractual undertaking. Quoting the same ICC guidance paper: “The implementation by a bank of an internal sanctions-related policy that goes beyond what is required under the laws and regulations applicable to that bank is an illustration of that discretion.”

In other words, for a sanctions clause to be valid and enforceable, (a) it must not be contradictory to the commercial purpose of the relevant undertaking, and (b) it must be narrowly worded within the confines of the applicable sanctions laws and regulations.

As an example, consider the Sanctions Clause in this case:

[Confirming Bank] must comply with all sanctions, embargo and other laws and regulations of the U.S. and of other applicable jurisdictions to the extent they do not conflict with such U.S. laws and regulations (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents or for any related disclosure of information.

(B) In relation to invoking the Sanctions Clause to deny payment to the beneficiary, let us briefly review some of the details in this case:

1. The cargo was shipped on a vessel known as the Omnia, which, according to Confirming Bank’s Master List, was likely to be beneficially owned by a Syrian entity and subject to US sanctions. However, the Omnia was not listed in the publicly available US Office of Foreign Assets Control (OFAC) List.₂ In fact, whilst the vessel was formerly known as Lady Mona and owned at that time by a Syrian entity, after its name was changed to the Omnia on 4 February 2019, the Lloyd’s List Intelligence database listed its registered owner as “Omnia Maritime Limited”, a Barbados entity.

Its technical and ISM Manager is listed as Serenity Ship Management, a UAE entity. It appears that none of the Omnia’s shipowning/operating entities bore any “Syrian nexus” in 2019.₃

2. Whilst there was an unresolved possibility that the Omnia could be caught under US sanctions, Confirming Bank took a risk-based decision that it would rather be sued by Beneficiary as a result of failing to pay against a complying presentation than be found by OFAC to have breached US sanctions.

3. The Court of Appeal’s view was that the question of whether a vessel is “subject to any applicable restriction” should be determined on an objective basis, without third-party input from entities such as OFAC. On an objective basis, the evidence did not prove that the Omnia was under Syrian beneficial ownership. As such, Confirming Bank was not entitled to invoke the Sanctions Clause to deny payment to Beneficiary upon a complying presentation.

It is clear from the above that the burden of proof is on the confirming bank that objectively there is a breach of the pertinent sanctions regulations, based on which the confirming bank is entitled to invoke the sanctions clause to deny payment to the beneficiary.

Further, from a beneficiary’s perspective, it needs to be reckoned that in selling on one of the F- terms (Incoterms, e.g., FOB), there is a risk that the vessel nominated by the buyer may be caught under sanctions. It would help to mitigate the risk if the underlying contract with the buyer could contain provisions to ascertain that the vessel will not be in breach of sanctions and that the seller will be compensated by the buyer in the event of a breach. Whilst this does not mitigate the risk of LC payment being stalled due to sanctions breach relating to the vessel, it would provide the seller legal redress against the buyer and compel the buyer to exercise caution in its nomination of the vessel.

As regards an applicant, in order to smoothly complete a transaction – receiving the goods in time and paying the supplier promptly – it needs to exercise caution in its nomination of the vessel from a sanctions compliance perspective.

* Gabriel Sham is an independent consultant providing training and advice on trade finance matters to banks and corporates. Gabriel was formerly a trade finance banker with leading international banks including HSBC, Citi, Standard Chartered, JPMorgan, and RBS. He is a DCW Editorial Advisory Board Member.

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