Letters Of Credit & Sanctions

• Published date: 08 June 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, International Law, Financial Services, Corporate and Company Law, Export Controls & Trade & Investment Sanctions
• Law Firm: Hannaford Turner
• Author: Ms Grace Asemota

A principal characteristic of letters of credit (LCs) is their autonomous nature. For those LCs that incorporate the ICC's Uniform Customs and Practice for Documentary Credits Publication No. 600 (UCP 600), Articles 4 and 5 emphasize the autonomy principle by stating that banks deal with documents only, not with good or services to which the documents may relate, and that the LC is a separate transaction from the underlying contract. A further characteristic of LCs, particularly those that incorporate UCP 600, is the irrevocable nature of the undertaking given by the bank (issuing bank and confirming bank (if any)) to the beneficiary of the LC. There has been concern for many years amongst trade finance practitioners and corporates dealing with LCs that both the autonomy and irrevocability of LCs are at risk of being undermined through the increasing use of a varied range of sanction clauses.

As we know, sanctions are essentially tools used by governments to achieve political and economic ends. Sanctions regulations are complex, they come in many shapes and forms and the penalties for breach are severe. Sanctions may prohibit or restrict dealings with specific countries, persons or property by imposing restrictions on travel, dealings with specific individuals or entities subject to economic sanctions. There is no doubt that financial institutions (FIs), particularly those with a wide geographic footprint, are under a heavy burden to ensure that the restrictions imposed by sanctions are complied with. Those FIs may be impacted by different sanctions regimes in the different jurisdictions in which they operate, as well as sanctions relating to the country of the currency or the place of payment and jurisdiction whose laws govern the LC transaction.

It is accepted, certainly as a matter of English law, that sanctions (if they apply) override obligations under LCs, such that the FI may be prevented from making payment regardless of the terms of the LCs. For that reason, there are two key questions to be considered when considering the impact of sanctions on an LC transaction, namely¹:

1. Do the sanctions prohibit the issuance, confirmation, extension or payment under the LC²?

2. Is the issuing or confirming bank bound by those sanctions?

The first question entails consideration of the wording of the sanctions, as clarified or further expounded by national regulators or administrative agencies or the courts. However, FIs may seek to limit the scope for debate...