A bank could not invoke a sanctions clause to deny liability under a letter of credit, the Singapore Court of Appeal has held. The clause required the bank to prove on the balance of probabilities that a sanction applied to the transaction. The inconclusive red flags the bank relied on were insufficient to discharge this burden. The bank’s risk-based approach to refusing performance was not consistent with the sanctions clause: Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A.  SGCA 28.
The Court also discussed without deciding the possibility that at least some sanctions clauses in the context of documentary credit transactions may be unenforceable. Depending on its scope, a clause might be incompatible with the underlying commercial purpose of, and the standardised rules incorporated into, these transactions. For example, the Court stated that a clause purporting to allow a risk-based approach like that adopted by the bank in this case “would most likely” be incompatible.
This case involved a typical letter of credit arrangement relating to the shipment of coal. JPMorgan was the advising and confirming bank in respect of LCs naming Kuvera as the beneficiary. In ordinary circumstances, JPMorgan would be contractually liable to pay Kuvera under the LCs on Kuvera presenting the requisite documents relating to the coal shipment.
However, JPMorgan’s advices and confirmations were subject to a sanctions clause, which relevantly excluded its liability “should the documents be presented involving any… vessel… listed in or otherwise subject to any applicable restriction [sanction, embargo and other laws and regulations of the U.S., etc.]”.
After Kuvera presented the requisite documents, JPMorgan invoked the sanctions clause and refused to process these documents. JPMorgan did so because its due diligence identified red flags suggesting the vessel that shipped the coal (the “Omnia”) was Syrian owned and therefore subject to US sanctions. While these red flags were inconclusive, JPMorgan could not resolve them to its satisfaction. In other words, JPMorgan adopted a “risk-based approach” in refusing performance because of the risk that doing so would breach a sanction.
Was JPMorgan entitled to invoke the sanctions clause?
The Court having found that the sanctions clause formed part of the contract between JPMorgan and Kuvera, the case turned on whether JPMorgan was entitled invoke this clause to deny liability. As the Omnia was not “listed in… any applicable restriction”, the relevant question was whether the Omnia was “otherwise subject to any applicable restriction”.
The Court held that to come within these words, JPMorgan needed to show on the balance of probabilities that the Omnia was Syrian owned. JPMorgan could not discharge this burden as the various red flags it relied on were inconclusive. JPMorgan’s risk-based approach was inconsistent with the language of the sanctions clause. This was so even though JPMorgan’s ability to invoke the sanctions clause might in practice be hampered due to the lack of publicly available evidence on ownership.
In light of this conclusion, the Court held that JPMorgan was liable to pay damages to Kuvera for its failure to honour its obligations with respect to the LCs.
Was the sanctions clause incompatible with the commercial purpose of the contract?
The Court considered a further issue with implications going beyond the facts of this case. That is, whether the sanctions clause was unenforceable due to incompatibility with the underlying purpose of, and the standardised rules incorporated into, the letter of credit transaction. While the Court did not resolve this issue, the Court made observations relevant to future disputes on this issue.
The Court observed that while there have been recent English decisions giving effect to sanctions clauses in commercial transactions, none of these decisions considered the “unique” circumstances of a documentary credit transaction. The Court stated that a sanctions clause purporting to permit a confirming bank to refuse payment due to the mere risk of breaching a sanction “would most likely be incompatible with the commercial purpose of the Confirmation”.
The Court further stated that even a sanctions clause requiring the confirming bank to prove that a sanction applied on the balance of probabilities – like the clause in this case – created uncertainty for the beneficiary. This is because the Omnia’s Syrian connection would not have been apparent to Kuvera based on publicly available information. That uncertainty, the Court stated, “may run counter to the commercial purpose” of the confirmation.
While the scope of each sanctions clause will depend on its language and context, the sanctions clause in this case was not unusual in its framing. As such, this decision stands against the kind of risk-based approach adopted by JPMorgan in this case.