The title of this article may seem enigmatic, but sometimes things are not as simple as they may seem. ICC rules for sure are not – as they are subject to interpretations and each party read them in the most favourable manner – for them.
Nothing new. Those of us who are involved in the world of Ls/C are well aware of this.
The case that is presented in this article begins with an applicant who, in his application to issue an L/C, calls for (among other documents) an Insurance policy in two originals plus 2 copies for full invoice value plus 10 percent, covering all risks, payable to the order of applicant.
The issuing bank complies with this, and in field 46 A in the L/C – i.e., MT700, among the other requested documents, it includes:
Full set 2/2 Insurance policy for full invoice value plus 10%, covering all risks, payable to the order of applicant.
Perhaps the form used to request insurance documents is not the most common, since the expression “full set” is used much more to require bills of lading, but nevertheless we cannot in any way consider that this is a bad drafted L/C.
The beneficiary, at the time of contracting the insurance, does so correctly and contracts a policy for the value of the invoice plus 10%, covering all risks and payable to the order of applicant, as instructed.
But the insurance company issues, as this company has as a rule, a set of 3 originals and three copies.
The beneficiary attaches, with the rest of the documents, at the time of making the presentation two of the three originals received, as requested by the L/C.
When the documents arrive at the issuing bank, where the L/C was available, it raises a discrepancy with reference to ISBP 745 paragraph K8 which reads:
''When a credit requires the insurance document to be issued in more than one original, or when the insurance document indicates that it has been issued in more than one original, all originals are to be presented and are to appear to have been signed ''.
The beneficiary indicates that he cannot accept this discrepancy, since the L/C requested full set 2/2, and in this case the full set of 2/2 was presented.
Analysing ISBP 745 paragraph K8 in this case it is clear that the L/C required more than one original (specifically 2) and it is also clear that the insurance document indicates that it has been issued in more than one original (specifically 3) and it is also clear that not all the originals have been presented under the L/C.
However, the beneficiary justifies himself before the issuing bank, saying that he has not presented the third original, because of UCP 600 article 14(g) which states:
“A document presented but not required by the credit will be disregarded and may be returned to the presenter.”
The document was not presented in this case, and therefore, this article would not be applicable, but if it had been presented, what would the issuing bank have done?
It would have applied UCP 600 article 14(g) and returned the third original or, on the contrary, would they have accepted the third original, ignoring that the L/C requested only two and without raising the discrepancy based on ISBP 745 paragraph K8?
Sanctions clauses – It’s a Jungle Out There
By Otis Sycamore (Mr. Sycamore is a retired banker)
There are always many discussions going on within the L/C world. Some are very nuanced – involving a crazy number of “variations” and augments on both sides. One example of that is “negotiation”. Another discussion that seems not to be nuanced at all are the so-called “sanctions clauses”; i.e., sanctions disclaimer clauses included into L/Cs. Here, there seems to be only one “correct” view; namely that sanctions clauses are the devil itself. Full stop. Basically, the view is that sanctions clauses are linked to the commercial agreement which the L/C is separate from.
The ICC have issued two documents on the topic i.e., the Guidance Paper on the Use of Sanctions Clauses in Trade Finance-related Instruments Subject to ICC Rules (2014) and the subsequent Addendum dated May 2020. Most recently, the issue has been addressed in ISDGP (International Standard Demand Guarantee Practice) includes two paragraphs on sanctions clauses, i.e., paragraphs 214 and 215. Here are some quotes from those two:
“ICC discourages the use of sanctions clauses in guarantees, as it does in documentary and standby letters of credit and in documentary collections.”
“The use of sanctions clauses may put into question the irrevocable character of the undertaking and may be considered as a non-documentary condition.”
“Guarantors should be aware that, by taking the initiative of adding a sanctions clause into a guarantee the terms of which had been agreed between the applicant and the beneficiary, they risk causing the beneficiary’s rejection of the guarantee and the applicant potentially to be excluded from a bidding process for non-compliance with the bidding terms.”
These statements give a somewhat unnuanced picture of something that perhaps is the most complex of all: Namely economic sanctions. One may ask if the problem is that there are sanctions clauses, or if the problem is that there are economic sanctions. It is naïve to think that the problem is the sanctions clauses.
On that backdrop, let’s try do dive into some of the issues.
Why are there sanctions clauses in L/Cs?
Most of the Ls/C issued involve different jurisdictions, e.g., the country of the buyer, seller, and often reimbursing bank (linked to the currency of the L/C). Each may be (often is) subject to different sanctions regimes.
Therefore, there may in fact be a need (perhaps even a good reason) to inform the counterparties about the sanctions regimes that apply.
In fairness, it is also a risk-management tool that are enforced by the compliance and legal departments of a bank. One can have many views about this, but it stems from the fact that Ls/C involve many jurisdictions which increase the complexity and thereby the risk. In this case the sanctions risk, which is a risk where many banks have a “zero tolerance approach”.
Are sanctions clauses always a problem?
Let’s take the outset in one of the above ICC quotes. I.e., the quote from ISDGP paragraph 214:
“ICC discourages the use of sanctions clauses in guarantees, as it does in documentary and standby letters of credit and in documentary collections.”
This statement is actually not 100% correct. What the “Guidance Paper on the Use of Sanctions Clauses in Trade Finance-related Instruments Subject to ICC Rules” says is that:
“In trade finance transactions involving letters of credit or demand guarantees subject to ICC rules, practitioners should refrain from bringing into question the irrevocable, independent nature of the credit, demand guarantee or counter-guarantee, the certainty of payment or the intent to honour obligations. Failure to do so could eventually damage the integrity and reputation of letters of credit and demand guarantees which may have a negative effect on international trade.”
Reading this, the problem is not sanctions clauses per se but rather those that bring into question of the irrevocable, independent nature of the L/C. The document also describes sanctions clauses that are “problematic”. In the document the following sanctions clause is referenced:
“[Bank] complies with the international sanction laws and regulations issued by the United States of America, the European Union and the United Nations (as well as local laws and regulations applicable to the issuing branch) and in furtherance of those laws and regulations, [Bank] has adopted policies which in some cases go beyond the requirements of applicable laws and regulations. Therefore [Bank] undertakes no obligation to make any payment under, or otherwise to implement, this letter of credit (including but not limited to processing documents or advising the letter of credit), if there is involvement by any person (natural, corporate or governmental) listed in the USA, EU, UN or local sanctions lists, or any involvement by or nexus with Cuba, Sudan, Iran or Myanmar, or any of their governmental agencies.” [emphasis added]
This sanctions clause is deemed more problematic in that it refers to internal policies that are unknown to the nominated bank.
On the other hand, the document also includes another clause:
“[notwithstanding anything to the contrary in the applicable ICC Rules or in this undertaking,]
We disclaim liability for delay, non-return of documents, non-payment, or other action or inaction compelled by restrictive measures, counter-measures or sanctions laws or regulations mandatorily applicable to us or to [our correspondent banks in] the relevant transaction.”
This is actually a sample clause suggested by the ICC.
In other words, it is not correct that the ICC discourages the use of sanctions clauses. It is so that whether or not a sanctions clause is problematic will depend on the actual clause.
What most likely makes the whole issue problematic is 1) that there is no standard for how sanctions clauses are drafted, and 2) that they are often drafted by lawyers. Just take a look at the problematic clause mentioned above. This clause may not be easy to read for all people.
Sanctions clauses – it’s a Jungle out there
As suggested above, although the ICC have suggested a sanctions clause, there is no standard, and there exist hundreds – if not thousands of variations. In the appendix to this article a small number of those are added and commented upon.
The consequence of the above is that each bank – and beneficiary for that matter – must find a process and practice for how to deal with sanctions clauses. Some of the elements to consider are:
These are not easy questions. The easiest way is to refuse to handle Ls/C with sanctions clauses, but that is a very unnuanced approach. The correct way would be to evaluate and handle each sanctions clause on a case-by-case basis, but that may be time consuming and may disrupt the handling of the L/C.
Is a sanctions clause a non-documentary condition?
A question that has been raised is if a sanctions clause inserted into an L/C is a non-documentary condition. The “Addendum to the Use of Sanctions Clauses in Trade Finance-related Instruments Subject to ICC Rules, including Documentary and Standby Letters of Credit, Documentary Collections and Demand Guarantees” (Issued by the ICC Global Banking Commission—2020) even includes this wording:
“They are non-documentary conditions for the purpose of the UCP and the URDG.”
UCP 600 article 14(h) reads:
“If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.”
The sub-article is explained by Professor James E. Byrne in “UCP600: An Analytical Commentary” (ISBN 978-1-888870-47-3) in the following manner:
“[...] In UCP600 Article 14(h), it signifies that no attention should be paid to a term in a credit or an amendment in determining whether or not the presentation complies.”
(Page 654, point 16)
The scope of UCP 600 article 14(h) is therefore conditions relevant for determining if the presented documents constitute a complying presentation. Sanctions clauses are disclaimer clauses and are not relevant for determining if the presented documents constitute a complying presentation. Therefore, sanctions clauses (such as the ones quoted above) cannot be considered a non-documentary condition, and therefore cannot be disregarded for that reason.
Conclusion – how to deal with sanctions clauses?
As argued above, sanctions clauses in Ls/C and guarantees are there because of the sanctions regimes imposed by countries and international bodies. Some of the problems related to sanctions clauses are:
Therefore, the banks that are in the other end of the sanctions clause must establish a process on how to handle Ls/C and guarantees that includes a sanctions clause. As indicated above that may be tricky.
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Appendix to Sanctions clauses – It’s a Jungle Out There – Selected Sanctions Clauses
The following is a small selection of sanctions clauses inserted into Ls/C. The clauses have been anonymized – both in respect of the bank and the country of the bank. At the right there is a short comment / evaluation. This is not a legal analysis but rather a high-level comment pointing to potential problems with the sanctions clause.
Sanction clause
[BANK] WILL NOT ACCEPT OR NEGOTIATE ANY DOCUMENTS OR HANDLE ANY TRANSACTIONS THAT ARE IN BREACH OF ANY APPLICABLE LAW OR REGULATORY SANCTIONS INTERNATIONALLY RECOGNIZED.
Evaluation
This is a very "broad" clause - and the problematic part is that it seems to go beyond what applies to the bank, but also includes "sanctions internationally recognized" (whatever that means).
Sanction clause
IT SHOULD BE CLEARLY ACKNOWLEDGED THAT [BANK] HAS ACCEPTED TO ACT UNDER THIS L/C ON THE EXPRESS CONDITION THAT NONE OF ITS DIRECT OR INDIRECT CONSTITUENTS AND/OR PARTIES AND/OR ELEMENTS AND/OR DOCUMENTS AND/OR LINKS OF WHATSOEVER NATURE (SHIP, VESSEL, PORT,...) FALL OR WOULD FALL AT ANY PHASE OF THE L/C, UNDER US, UN OR EU SANCTIONS OR ANY OTHER SANCTION. NOTWITHSTANDING THE ARTICLES OF UCP600 REVISION 2007 OR ANY OTHER REVISION, [BANK] WILL BE DISCHARGED TOWARDS ALL PARTIES OF ANY RESPONSIBILITY AND LIABILITY OF WHATEVER NATURE AND FOR WHATSOEVER REASON IF IT OR ANY OTHER PARTY FAILS OR DELAYS TO PERFORM THE TRANSACTION AS A RESULT OF ACTUAL OR APPARENT BREACH OF SUCH SANCTIONS. THUS, ANY PRESENTATION OF DOCUMENTS MADE UNDER THIS DOCUMENTARY CREDIT THAT IN OUR SOLE JUDGEMENT CONSTITUTES A BREACH OF THE AFOREMENTIONED SANCTIONS, SHALL BE RETURNED BY US TO THE PRESENTER AS UNNEGOTIATED, UNACCEPTED AND UNPAID DOCUMENTS, TO OUR COMPLETE DISCHARGE WITHOUT ANY RISK AND/OR RESPONSIBILITY ON OUR PART NOR LIABILITY FOR ANY LOSS, DAMAGE, COST, EXPENSE, CHARGE OR DELAY ARISING THEREFROM.
Evaluation
This clause is not only very "broad" it also is very leaves it entirely up to the bank to decide if there is a breach. It even talks about an "apparent breach".
Sanction clause
ALL PARTIES TO THIS TRANSACTIONS ARE ADVISED THAT THE U.S. AND OTHER GOVERNMENT AGENCIES AND/OR REGULATORY AUTHORITIES IMPOSE SPECIFIC SANCTIONS AGAINST CERTAIN COUNTRIES, ENTITIES, INDIVIDUALS AND FINANCIAL INSTITUTIONS. WE MAY NOT BE ABLE TO PROCESS ANY TRANSACTION THAT INVOLVES A BREACH OF SANCTIONS, AND AUTHORITIES MAY REQUIRE NECESSARY DISCLOSURE OF INFORMATION, UNTIL THE REQUIRED AND SATISFACTORY DISCLOSURE IS OBTAINED. [BANK] ASSUMES NO LIABILITY, IF [BANK] IS UNABLE TO HANDLE OR DELAYS, ANY TRANSACTION, AS A RESULT OF ACTUAL OR APPARENT BREACH OF SUCH SANCTIONS, AND ANY NECESSARY/SATISFACTORY DISCLOSURE COULD NOT BE OBTAINED.
Evaluation
This is a very broad clause, that talks about "certain countries" and "other government agencies".
Sanction clause
SHIPMENT AND TRANSSHIPMENT (IF ANY) AND THE ORIGIN OF GOODS MUST NOT INVOLVE ANY SANCTIONED COUNTRY OR ANY SANCTIONED PORT OR ANY SANCTIONED PARTY AND CARRIER.
Evaluation
The problematic part is that it refers to “sanctioned country”. There is no official definition of such. Likewise, it refers to sanctioned party and carrier but does not limit it to what applies to the bank.
Sanction clause
PURSUANT TO ANTI-MONEY LAUNDERING, TERRORIST FINANCING OR SANCTION LAWS OR REGULATIONS INCLUDING, WITHOUT LIMITATION, THOSE ECONOMIC SANCTIONS ISSUED, ADMINISTERED OR ENFORCED BY [COUNTRY], UNITED NATIONS, THE EUROPEAN UNION, THE UNITED STATES OF AMERICA AND THE UNITED KINGDOM OR ANY OTHER JURISDICTIONS, UNDERLYING TRANSACTIONS OR PRESENTED DOCUMENTS SHOWING ANY INVOLVEMENT WITH SANCTIONED COUNTRIES, ENTITIES, INDIVIDUALS, BANKS, PORTS, SHIPS, GOODS ETC. WILL NOT BE PROCESSED AND [BANK] HAS THE RIGHT NOT TO HONOR. [BANK] WILL NOT BE LIABLE FOR ANY ACTION OR INACTION ON ITS PART IN COMPLIANCE WITH SUCH ANTI-MONEY LAUNDERING, TERRORIST FINANCING OR SANCTION.
Evaluation
This is a very broad clause that refers to any involvement with “sanctioned countries” (which is an undefined term).
Sanction clause
BREACHES OF LOCAL AND INTERNATIONAL ANTI-MONEY LAUNDERING OR ECONOMIC SANCTIONS LAWS AND REGULATIONS ADMINISTERED BY, INCLUDING BUT NOT LIMITED TO [COUNTRY], UNITED NATIONS, UNITED STATES, ARE NOT ACCEPTABLE. OUR BANK MAY REJECT ANY TRANSACTION IN VIOLATION OF ANY OF THESE LAWS AND REGULATIONS WITHOUT ANY LIABILITY ON OUR PART.
Evaluation
The clause refers broadly to “laws and regulations” but does not limit it to what is applicable to the bank/transaction.
Sanction clause
IF THE TRANSACTION VIOLATES ANY LAWS AND REGULATIONS OF ANY JURISDICTION (INCLUDING, BUT NOT LIMITED TO, [COUNTRY] AND/OR UNITED STATES) INCLUDING ANTI-MONEY LAUNDERING, ANTI-BOYCOTT, ANTI-TERRORISM, ANTI-DRUG TRAFFICKING, OFFICE OF FOREIGN ASSETS CONTROL, EXPORT DENIAL, AND SIMILAR LAWS AND REGULATIONS, [BANK] HAS THE RIGHT TO, AND MAY, REJECT PAYMENT UNDER THIS LETTER OF CREDIT.
Evaluation
The clause is very broad and the wording "but not limited to" makes this a wild card that seems not to be limited in any way.
Sanction clause
THE COUNTER-GUARANTEE'S UNDERTAKING SHALL AUTOMATICALLY BE SUSPENDED IF:
THE APPLICANT, THE BENEFICIARY (OR ANY OTHER MEMBER OF THEIR RESPECTIVE GROUPS) OR ANY OTHER PERSON, ENTITY, ORGANIZATION INVOLVED IN THE GUARANTEE OR IN THE MAIN CONTRACT AND/OR,
THE GOODS OR SERVICES SPECIFIED IN THE MAIN CONTRACT, BECOME SUBMITTED TO AN INTERNATIONAL SANCTION ADOPTED BY THE EUROPEAN UNION OR BY ANY OF ITS MEMBER STATE, THE UNITED NATIONS, THE UNITED KINGDOM AND/OR THE UNITED STATES OF AMERICA, AND IF THE PERFORMANCE OF ITS OBLIGATIONS BY [BANK] COULD CONSTITUTE, OR CONTRIBUTE TO, IN A DIRECT OR INDIRECT WAY, A VIOLATION OF THESE SANCTIONS.
IN THIS SITUATION, [BANK's] UNDERTAKING WILL BE TERMINATED WITH THE NOTIFICATION THAT THE BANK MAY SEND
Evaluation
The clause is very broad and the undertaking by the bank can be terminated by a notification; to which there is no description or requirement.
Sanction clause
FOR THE PURPOSE OF COMPLYING WITH (I) THE LEGAL REQUIREMENTS OF THE UNITED NATIONS, THE EUROPEAN UNION, [COUNTRY], THE UNITED STATES OF AMERICA OR ANY OTHER JURISDICTIONS IN WHICH [BANK] OPERATES (COLLECTIVELY, THE ''APPLICABLE LAWS''), OR (II) ANY REGULATIONS, SANCTION REGIMES, INTERNATIONAL GUIDANCE OR PROCEDURES OF THE RELEVANT REGULATORY OR INDUSTRY BODY THAT MAY BE APPLICABLE TO THE BANK FROM TIME TO TIME (COLLECTIVELY, THE ''COMPLIANCE RULES''), IN RELATION TO ANTI-MONEY LAUNDERING, TERRORIST FINANCING, OTHER CRIMES OR SANCTIONS (INCLUDING SANCTIONS ON OR RELATING TO ANY PERSONS, ENTITIES, VESSELS OR COUNTRIES), THE BANK IS ENTITLED TO TAKE OR OMIT TO TAKE ANY ACTION WHICH IT, IN ITS SOLE AND ABSOLUTE DISCRETION, CONSIDERS APPROPRIATE TO TAKE OR OMIT TO TAKE (A ''COMPLIANCE ACTION''). IN PARTICULAR, THE BANK IS ENTITLED NOT TO HANDLE OR PROCESS, AND NOT TO EFFECT PAYMENT IN CONNECTION WITH, ANY TRANSACTION UNDER OR RELATING TO THIS LETTER OF CREDIT ON THE GROUND OF, OR AS A RESULT OF, A COMPLIANCE ACTION OR COMPLIANCE WITH ANY APPLICABLE LAWS OR COMPLIANCE RULES. THE BANK WILL NOT BE LIABLE FOR ANY CLAIM, COST, EXPENSE, LOSS OR DAMAGE SUFFERED BY ANY PARTY ARISING OUT OF OR IN CONNECTION WITH THE EXERCISE OF ANY BANK'S RIGHTS HEREUNDER OR ANY COMPLIANCE ACTION AND THE BANK WILL NOT BE LIABLE FOR ANY DELAY OR FAILURE TO PAY, PROCESS, HANDLE OR ENGAGE IN SUCH TRANSACTION OR TO RETURN ANY DOCUMENTS AS A RESULT THEREOF.
Evaluation
This clause is very long, and complex in it wording. One problematic part is the wording; "ANY ACTION WHICH IT, IN ITS SOLE AND ABSOLUTE DISCRETION, CONSIDERS APPROPRIATE TO TAKE OR OMIT".
Sanction clause
THIS LC IS SUBJECT TO US, EU, UN, OR ANY OTHER SANCTIONS IN FORCE (INCLUDING DUE TO USE OF A CORRESPONDENT BANK). CONSEQUENTLY, PROCESSING OF THIS LC WOULD BE SUBJECT TO THE SAME
Evaluation
This clause is very broad as it refers to “any other sanction in force”; i.e., not limited to what applies to the bank.
Sanction clause
[BANK] complies with national and international sanctions laws and regulations issued by the European Union, the United Nations and the United States of America (the "Sanctions Laws and Regulations"), and [BANK] adopted internal policies and procedures to comply with those laws and regulations, when they are not contrary to imperative laws and regardless of their applicability to the transaction at stake. Therefore, if the transaction concerns, directly or indirectly, parties, countries or territories that are, or becomes, subject to Sanctions Laws and Regulations, [BANK] shall, in express derogation of any obligation assumed, refuse to execute such transaction and reject the pertinent documents and any further request. We also acknowledge and accept that [BANK] will not be deemed liable for any loss, damage or delay due to such refusal or to the application of the Sanctions Laws and Regulations. In this respect, on the base of the documents at our disposal, we checked that this documentary credit is compliant with the abovementioned Sanctions Laws and Regulations and we are now leaving it up to you, or to the bank that will receive the documents in availment of this documentary credit, to take care of all the necessary checks requested by the aforementioned Sanctions Laws and Regulations.
Evaluation
The clause is long and complex, and one problematic part is the reference to "internal policies and procedures" which the other parties involved in the L/C does not know.
