Singapore: Singapore's Highest Court Rejects Bank's Own Sanctions List

Washington, D.C. (December 21, 2023)- Singapore's Court of Appeal ("Court") recently ruledthat a bank's determination that a vessel was subject to U.S. sanctions laws and regulations was an insufficient basis for denying payment to a beneficiary on letters of credit for which the bank was responsible.

Kuvera Resources Pte Ltd ("Kuvera") sued JPMorgan Chase Bank, NA ("Chase") to reverse the bank's denial of liability to pay Kuvera under the confirmations to two letters of credit, as to which Kuvera was the beneficiary. Chase had denied payment on the basis that the confirmations bore a contractual clause (the "Sanctions Clause") that extinguished Chase's responsibility to pay because the underlying commercial transaction was allegedly caught by the sanctions laws of the U.S.

A lower court previously dismissed Kuvera's claim after finding that the Sanctions Clause had been duly incorporated as a contractual term of the confirmations to the two letters of credit, that the Sanctions Clause was valid and enforceable and that the Sanctions Clause entitled Chase to refuse payment to Kuvera.

Description of the Transaction

In 2019, an Indonesian company contracted to sell coal to a company in the United Arab Emirates. To facilitate this transaction, Kuvera advanced funds to the seller to purchase the coal, which would then be sold to the subsequent buyer. The buyer was to pay for the coal by way of two letters of credit (the "LCs") in which Kuvera was to be named as the beneficiary. The bank that issued the LCs in turn appointed Chase as the advising and nominated bank for the LCs, and Chase duly advised on the LCs and confirmed the LCs and their amendments.

The Sanctions Clause provided that Chase must comply with U.S. sanctions laws and regulations and that, should documents be presented involving any vessel "listed in or otherwise subject to any applicable restriction," Chase would not be liable for any failure to pay.

In 2015, Chase had determined that a ship, the Lady Mona, was owned by a company that had its head office in Cyprus but also an office in Syria, which was subject to U.S. sanctions. Consequently, the Lady Mona was placed on Chase's Master List, an internal list that included entities and vessels found to have a sanctions nexus and/or concern.

Sometime thereafter, the Lady Mona's name was changed to the Omnia and was reflagged by a potential shell company in Barbados, with no beneficial ownership reported. The Court found that in 2019 "while the information was not conclusive on who the beneficial owners of the vessel were, based on prior knowledge of the Syrian ownership and connections, and the risk associated to the name change, and ownership layers to potentially disguise Syrian ownership...[Chase] made a risk-based decision to retain the vessel on its internal filter as a Syrian-owned vessel."

The Singapore Court of Appeal Findings

The Court stated that "the crucial issue is whether the Omnia under her new registered ownership remained under Syrian beneficial ownership in 2019."

The Court acknowledged the existing "red flags" identified by Chase (see our previous alert on "red flags" as defined by U.S. agencies) should have prompted it to explore the status of the Omnia. However, it determined that Chase "was required to demonstrate how, on the specific facts and circumstances of this case, such masking of the Omnia's true ownership was likely to have occurred. It was not uncommon for vessels from a flag of convenience registry to not provide information about the vessels' beneficial ownership."

The Court also examined the nature of a letter of credit and the roles of the issuer and beneficiary of a letter of credit. It acknowledged that "[T]he question of whether sanctions clauses are incompatible with the nature of irrevocable documentary credit transactions remains an open and difficult one. It may be problematic for a bank to have it both ways by representing to a beneficiary that payment is conditioned only on a complying demand, but reserving the right to dishonor where it is unsure of its legal liabilities if it decides to pay."

In its further examination of the case, the Court stated "that sanctions clauses which allow banks a discretion to dishonor a presentation if payment would violate the bank's internal policies in relation to sanctions compliance, i.e., which give the bank a discretion to withhold payment if it suspects that it may be subject to sanctions, may undercut the purpose of the letter of credit by calling the issuer's obligations into question and run counter to the legal certainty and predictability inherent in a letter of credit transaction."

The Court determined that a "balance must be struck between preserving the autonomy of individual contracts within a documentary credit transaction (such that it is open to parties to insert conditions in each autonomous contract) and upholding the commercial viability of a documentary credit transaction...."

It concluded that in this case, the Chase sanctions clause "would most likely be incompatible with the commercial purpose of the Confirmations due to the significant unpredictability such an interpretation would introduce into the Confirmations."

Takeaway

Whether sanctions clauses are incompatible with the nature of irrevocable documentary credit transactions remains an open and difficult question.

It may be problematic for a bank to have it both ways by representing to a beneficiary that payment is conditioned only on a complying demand, but reserving the right to dishonor where it is unsure of its legal liabilities if it decides to pay.

Sanctions clauses are permissible additions to contracts, including letters of credit, but they should be as explicit as possible so as to give the beneficiary a clear understanding regarding the rights and obligations of the issuer as well as the beneficiary of the letter of credit.

In this case, the court determined that while Chase heeded red flags and included the Omnia on its internal sanctions list, its beneficial owner was not known and the Omnia was not on any OFAC sanction list. Consequently, the beneficiary of the letter of credit was entitled to payment from Chase.

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