The issue addressed in the Opinion is an L/C that includes a sanctions clause.Within the Opinion there are some elements that relate to my previous article“Sanctions clauses – It’s a Jungle Out There” (TSU Volume 25, Issue 1,January – March 2023). The purpose of this article is therefore to address therelevant issues from the Opinion and the Opinion as such.

Background for the Opinion

An L/C, denominated in USD (subject to UCP 600) was issued available with any bank by negotiation.

The L/C contained the following sanctions clause:

BREACHES OF LOCAL AND INTERNATIONAL ANTI-MONEY LAUNDERING ORECONOMIC SANCTIONS LAWS AND REGULATIONS ADMINISTERED BY,INCLUDING BUT NOT LIMITED TO CHINA, UNITED NATIONS, UNITED STATES,ARE NOT ACCEPTABLE.OUR BANK MAY REJECT ANY TRANSACTION INVIOLATION OF ANY OF THESE LAWS AND REGULATIONS WITHOUT ANYLIABILITY ON OUR PART

The nominated bank received a presentation from the beneficiary and forwarded same to the issuing bank.

Subsequently, the issuing bank accepted the draft due on 20 December 2022.

However, prior to the due date the issuing bank informed the nominated bank that they would not beable to pay because of “local and international laws and regulations and economic sanctions”. It isinferred that the applicant to the L/C was placed on the US OFAC list between acceptance and the duedate. It is not clear from the Opinion which OFAC list the Applicant has been placed on. This could forsure be relevant. For example, there is quite a difference between the OFAC SDN list22 and of OFACSSI list23.

In any case, during the communication between the nominated bank and the issuing bank, the issuingbank made two interesting proposals:

1. First, the issuing offered to settle the transaction in CNY
2. Second, the issuing bank asked the nominated bank to speak with the beneficiary about arranginga direct payment

Both proposals were rejected by the nominated bank.In the end the issuing bank made the following message to the nominated bank:

According to the article 1 of the Uniform Customs and Practice for DocumentaryCredits, 2007 Revision, ICC Publication no. 600 (“UCP600”), UCP600 are rulesthat apply to any documentary credit (“credit”) when the text of the credit expresslyindicates that it is subject to these rules. They are binding on all parties theretounless expressly modified or excluded by the credit, which means all parties arebound by UCP600 as well as stipulations and conditions in the specific L/C; and L/Cstipulations and conditions prevail instead of UCP600 in this case. The L/C in thiscase clearly states that breaches of local and international anti-money laundering ofeconomic sanctions laws and regulations administered by, including but not limitedto China, United Nations, United States, are not acceptable. Our bank may reject anytransaction in violation of any of these laws and regulations without any liability onour part in 47A.The nominated bank] and the beneficiary did not raise any questions when receivingthe L/C and presented the documents under the L/C, which means all parties acceptedthe stipulations and conditions in the L/C and thus are bound by the L/C. conditions.As the applicant is under sanction currently, [the issuing bank] may reject anytransaction under the L/C without any liability according to above stipulations andconditions of the L/C, which prevail in this case. Therefore, we can not effect thepayment under the LC.

The questions asked in the Query

Given the above, the nominated bank would appreciate an ICC opinion on the following:

1. Is the sanctions clause considered a non-documentary condition under UCP 600 sub-article 14 (h)?And if so, can the clause be disregarded and therefore have no effect on the underlying obligations ofthe issuing bank?
2. Is the issuing bank’s obligations under the L/C and accepted bill of exchange independent from theirunderlying agreement and the issuing bank is therefore obligated to honour?
3. Is the issuing bank obligated to honour unless the issuing bank can provide evidence that there areeconomic sanctions on the applicant under which they are prohibited from making payment?
4. If it is proven that the issuing bank is unable to pay due to sanctions does their obligation to payremain valid until they are able to make payment
5. The issuing bank has proposed to settle in CNY. Does this proposal contradict the position of thelocal laws preventing payment and suggest that they recognise their obligation to settle thiscommitment independent of any sanctions or local laws applicable to the applicant?

The answers from the ICC

For questions 2 through 5 the main answer is that this “is a matter outside the scope of the UCP 600”.The only real nuance provided is in question 3 where it is stated that “it is expected that a bank shouldprovide a reference to the applicable law or sanction regulation, and the document(s) and /or data inthe presentation to which it relates.”

Question 1 is more interesting. In my article “Sanctions clauses – It’s a Jungle Out There” it is boldlystated that:

“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 notrelevant 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.”

Somehow, this seems to be also kind of the same view of the ICC. However, the Analysis includes thefollowing wording:

“The Addendum to the Sanctions Guidance Paper, Introduction 2nd paragraph, states that sanctionsclauses are non-documentary conditions for the purposes of the UCP and the URDG and recommendsthat banks should refrain from issuing trade finance-related instruments that include sanctions clausesthat purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatoryrequirements.Non-documentary conditions are addressed in UCP 600 sub-article 14 (h) wherein it is stated that if acredit 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. However, the scope of this subarticle is in respect of determining if the presented documents constitute a complying presentation. Thelegality or enforceability of sanctions clauses may also involve considerations of mandatorylaw/regulations which may override the credit and the UCP.”

Here it is fair to say that the ICC is trying to eat the cake and have it. First, they, referring to “TheAddendum to the Sanctions Guidance Paper,” states that “sanctions clauses are non-documentaryconditions for the purposes of the UCP and the URDG”. Secondly, they, referring to UCP 600 sub-16article 14 (h), explains that the scope of this sub-article is in respect of determining if the presenteddocuments constitute a complying presentation – and further that “[t]he legality or enforceability ofsanctions clauses may also involve considerations of mandatory law/regulations which may overridethe credit and the UCP.”

The above statements are simply contradicting each other. Since the scope sub-article 14(h) is in respect of determining if the presented documents constitute a complying presentation, sanctionsclauses would per definition not be in scope for that sub-article. Likewise, if sanctions clauses reallyare “non-documentary conditions for the purposes of the UCP” then it could be disregarded. In myhumble opinion, this would not be a good advice to give to the beneficiary and to confirming banks.

ICC Opinion 470/TA930rev in perspective

I should be the one to salute the ICC for constantly providing Opinions on how to interpret the practicerules used in Trade Finance. This is for sure a great contribution to the industry.

However, there are queries, where the good advice would be not to provide an Opinion. ICC Opinion470/TA930rev is one of those. As can be seen from the above; on 4 out of 5 questions the ICC actuallydo not provide any answer. And for the last question, the answer seems to contradict itself and in worstcase provide some false comfort, as it may well be understood so that the sanctions clause can bedisregarded. As mentioned, this would not be a good advice to give to the beneficiary and toconfirming banks.

Another reason why the good advice would be not to provide an Opinion in this case, is that the wholeissue of sanctions is extremely complex, and it is only possible to provide guidance on a specific caseafter a thorough analysis. The underlying case to ICC Opinion 470/TA930rev is a specific case, and itis simply not possible to provide any qualified answer without having the full overview of the case. Asilluded to in the beginning of this article, it is important to know which list the applicant has beenplaced on. It is however also important to understand (not comprehensive):

• When was the applicant added to the list?
• When was the agreement made?
• When was the goods shipped?
• What are the goods?
• Are there other parties involved?

The assessment of the cases would in general involve a sanctions lawyer carefully considering whatsanctions apply – and what jurisdictions are involved in the transaction.

Conclusion

The issue of sanctions is complex – and so is the issue of sanctions clauses. From the newly publishedICC Opinion 470/TA930rev it is clear, that the complexities cannot be fully captured under the UCP600 framework. A main purpose of the ICC Opinions is to explain how to apply the UCP 600 (and 17other ICC rules) in practice. For this to make sense, the Opinions must be meaningful. For ICC Opinion470/TA930rev the answers are vague, and explained above, borderline misleading. For that reason, it isone of the Opinions where the ICC should probably have refrained from providing an answer.