Singapore Court of Appeal hands down decision on sanctions clause in Letters of Credit
Legal Development 19 October 2023 19 October 2023
UK & Europe
The Court of Appeal in Singapore recently handed down a decision about whether JPMorgan Chase Bank, NA (JPM) had discharged its burden of proof enabling it to rely on a sanctions clause. The case illustrates the challenges of conducting sanctions compliance due diligence that is sufficient for internal compliance purposes, relevant sanctions authorities as well as the courts.
In 2020, Kuvera Resources Pte Ltd (Kuvera) commenced an action against JPM to recover damages for breach of contract arising out of JPM’s refusal to pay Kuvera against a complying presentation of documents under a confirmed letter of credit.
At first instance, the General Division of the High Court of Singapore (High Court) found that it was permissible for JPM to incorporate its sanctions clause as a term of its confirmations as part of the confirmed documentary credit transaction, and that JPM was entitled to rely on such clause to refuse payment to Kuvera as JPM had assessed that there was a sanctions concern with one aspect of the transaction. Thus, Kuvera’s claim against JPM was dismissed.
Following Kuvera’s appeal to the Court of Appeal, the Court of Appeal reversed the decision of the High Court in part and found that JPM had not discharged its burden of proof to entitle it to rely on its sanctions clause to deny payment to Kuvera. In coming to its decision, the Court of Appeal also endorsed the High Court’s analysis of the underlying nature of documentary credit transactions and confirmations.
In July 2019, Kuvera advanced funds to an Indonesian company to purchase and on-sell coal to a company in Dubai for delivery in Pakistan. The sale contract obliged the buyer to pay for the coal by two confirmed, irrevocable, non-transferable and workable letters of credit (LCs), in favour of Kuvera as the beneficiary.
JPM was requested and agreed as the advising and nominated bank for the LCs, and added its confirmations thereto in September 2019 which contained a sanctions clause (Sanctions Clause) that provided that:
“[JPM] 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.”
In November 2019, Kuvera made a presentation of documents to JPM under the LCs, which JPM accepted to be a complying presentation that would have obliged it to pay Kuvera against the documents, but for the Sanctions Clause.
In this regard, JPM’s internal sanctions screening revealed that the vessel transporting the coal, i.e. the Omnia, was likely to be beneficially Syrian-owned, and therefore fell within the scope of sanctions imposed by the US on Syria. It should also be noted that JPM’s internal sanctions screening had previously identified Syrian beneficial ownership for the same vessel in 2015, but by 2019 the vessel had been re-registered and their UBO screening proved inconclusive. Accordingly, JPM informed Kuvera that it was unable to pay against Kuvera’s presentation of the documents.
High Court’s Decision
In dismissing Kuvera’s claim against JPM, the High Court agreed with JPM that the Sanctions Clause entitled JPM to refuse payment to Kuvera. Key aspects of the High Court’s findings are as follows:
a. The Sanctions Clause could be incorporated by JPM as a term of its confirmations, and there was no need for Kuvera to accept the Sanctions Clause or for JPM to supply consideration for it to be incorporated into the confirmations. The Court further clarified that a confirmed letter of credit transaction comprises multiple separate contracts, each being independent and autonomous. Therefore, there is no legal impediment to a confirming bank adding a term to its confirmation of a letter of credit which is not found in the letter of credit itself, and the High Court found that JPM had in fact drawn the Sanctions Clause to Kuvera’s attention.
b. The Sanctions Clause was valid and enforceable. The High Court found that the Sanctions Clause was not fundamentally inconsistent with the commercial purpose of a confirmed letter of credit because the issuing bank’s separate payment obligation to the beneficiary under the letter of credit remained unaffected. The High Court also found that the Sanctions Clause was a narrow sanctions clause, that did not confer a discretion on JPM that makes its confirmation de facto revocable.
c. The Sanctions Clause entitled JPM to refuse to pay Kuvera as JPM is subject to US sanctions laws and regulations in relation to its operations worldwide including through its Singapore branch, and paying Kuvera would have exposed JPM to a penalty for breaching US sanctions laws and regulations.
Court of Appeal’s Decision
In the decision of Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A.  SGCA 28, the Court of Appeal allowed Kuvera’s appeal in part and awarded damages to it.
The Court of Appeal agreed with the High Court that the Sanctions Clause could be and was incorporated by JPM as a term of its confirmations. It then went on to consider the following three questions:
- What was the true effect and meaning of the Sanctions Clause?
- Was the Sanctions Clause fundamentally inconsistent with the commercial purpose of the confirmations?
- Did JPM discharge its burden of proof in order to rely on the Sanctions Clause?
On the first question, the Court of Appeal held that the Sanctions Clause should be construed objectively, and that the relevant inquiry into the ownership of the Omnia ought to be determined on an objective basis.
It was undisputed that the Omnia was not listed in the U.S. Treasury’s Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List (OFAC List). As the party seeking to rely on the Sanctions Clause, the burden was on JPM to prove, on a balance of probabilities, that the Omnia was “subject to any application restriction” as envisaged by the Sanctions Clause.
Contrary to the High Court’s findings, the Court of Appeal held that JPM had not in fact discharged its burden in this regard. Amongst other things, the Court of Appeal noted that:
a. JPM had undertaken its own risk-based approach in deciding that the Omnia was likely to be Syrian-owned. In choosing to rely on its internal list (as opposed to the OFAC List) as part of its internal sanctions screening procedure, JPM had to accept the risk that such reliance may not be sufficient to demonstrate its burden of proof.
b. After refusing to make payment to Kuvera, JPM exchanged correspondence with OFAC that sought to seek retrospective justification for its refusal to pay. OFAC responded stating that an apparent violation of OFAC regulations would have resulted had payment been made to Kuvera on the basis of JPM’s research. However, the Court of Appeal noted that this exercise would require the parties and the court to extrapolate what finding OFAC may arrive at based on largely circumstantial evidence. Such an approach, which reflected JPM’s risk management considerations, was unsatisfactory and unfair.
c. There was no objective evidence that supported JPM’s determination that the Omnia was Syrian-owned in 2019. Notably, JPM had itself acknowledged that the circumstantial evidence it had detected in its due diligence as pointing towards the continued Syrian beneficial ownership of the Omnia in 2019 was “inconclusive”.
Accordingly, the Court of Appeal held that JPM was not entitled to invoke the Sanctions Clause to deny payment to Kuvera upon a complying presentation of documents.
Obiter, the Court of Appeal noted that a sanctions clause entitling a confirming bank to deny payment against a complying presentation according to its own assessment of the risk of being sued by either OFAC or the beneficiary was most likely incompatible with the commercial purpose of the confirmations, due to the significant uncertainty it would introduce.
Applied to the current case, Kuvera would not have known whether the Sanctions Clause would apply to deny it payment at the time it accepted the confirmations, as it would have been unaware of the Omnia’s nomination at the time JPM added its confirmations to the LCs. The Omnia’s alleged Syrian beneficial ownership would in any event not have been apparent from publicly accessible records.
It is a legal obligation for banks and corporations alike to comply with the general law of the jurisdictions they operate in, including applicable sanctions laws and regulations. It is no surprise therefore, that sanctions clauses have become commonplace in international trade and finance documents.
While the Court of Appeal did not express a definitive view as to the compatibility of sanctions clauses with the commercial purpose of confirmations, its decision nonetheless provides helpful confirmation that sanctions clauses can be incorporated into confirmed documentary credit transactions. This will undoubtedly be welcome clarity to parties seeking to mitigate sanctions risks by relying on contractual provisions.
Parties would do well to exercise great care in the appropriate drafting and incorporation of contractual clauses intended to mitigate sanctions risk, and ensure that it has sufficient objective evidence to justify their reliance on such clauses when necessary.
If you have any questions about the decision or this article, please contact Weiyi Tan or your usual contact at Clyde & Co.