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The overreaching arc of sanctions regulations is threatening the certainty of payments guaranteed by the smooth functioning of letters of credit (LC) in international trade.

This tension recently played out in the Singapore courts in a judgment handed down recently (Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28). 

The Singapore Court of Appeal overturned the first decision in Singapore concerning the enforcement of a sanctions clause. In November 2022, the High Court found that a sanctions clause had been validly incorporated into an LC confirmation, and it allowed the Singapore branch of JPMorgan Chase Bank, N.A. (the “Bank”) to decline payment to the beneficiary. 

The Court of Appeal upheld the findings on the incorporation of the sanctions clause, but considered that the clause did not justify the Bank’s failure to pay under the LC.

The Court found that the Bank’s risk-based decision, preferring to be sued by the beneficiary than be found by OFAC to have breached sanctions, was not contractually justified. 

Facts on Kuvera Resources v JPMorgan Chase Bank

The Bank had confirmed an LC issued in favour of Kuvera Resources Pte Ltd (“Kuvera”). All of the Bank’s advice and the confirmation contained a sanctions clause which (among other things) effectively precluded the Bank from paying if documents presented under the LC involved a vessel subject to US sanctions. 

Kuvera made a presentation under the confirmed LC concerning a cargo that was carried onboard the Omnia. During an internal sanctions screening, the vessel showed up in the Bank’s internal ‘Master List’ of entities and vessels determined to have a sanctions nexus. 

Whilst the Bank was unable to identify the beneficial owners of the Omnia, it relied on certain red flags concerning the vessel’s ownership. In particular, the vessel was previously called the Lady Mona, and its beneficial owners and technical operators had Syrian links. 

After her name changed and she received a new registered owner, it became impossible to ascertain the beneficial owners of the vessel or her technical and ISM managers. OFAC also issued guidelines and advisories placing US persons on notice of deceptive shipping practices undertaken to evade US sanctions. 

These practices included changing the names and registered owners of vessels, and using layered ownership structures to mask the fact that the ultimate or beneficial ownership of the vessels rested with sanctioned entities. 

OFAC specifically identified changing vessel names as a common evasive practice in relation to vessels owned by Syrian entities.

The Bank led uncontradicted expert evidence (Kuvera not having led any expert evidence) that OFAC would have found a breach of US-Syrian sanctions if the Bank made payment under the LC in respect of a cargo carried on the Omnia in the circumstances. 

Are red flags enough? 

In the first instance, the High Court found that OFAC would have found that payment under the confirmed LC would amount to a breach of sanctions.

It reached this conclusion on the basis of the Bank’s expert evidence, which highlighted (among other things) that the red flags in OFAC’s guidelines concerning masking ownership of vessels also applied to the Omnia. 

For the same reasons, the High Court was also independently satisfied that paying Kuvera would have amounted to a breach of sanctions. 

On appeal, the Court of Appeal held that the enquiry of whether a vessel is subject to any applicable restriction should be determined on an objective basis without any (potentially speculative and arbitrary) extrapolation of third-party input from entities such as OFAC. 

The court highlighted that while the court had to approach the question of the vessel’s ownership on a balance of probabilities (requiring a more than 50% chance of a Syrian connection), OFAC was not constrained by similar rules of evidence. 

The detection of red flags highlighted in OFAC’s advisories with respect to the ownership of the Omnia was found to be inconclusive circumstantial evidence, which created at best, an unresolved possibility that the Omnia may be caught under America’s Syrian sanctions.

The court also found it relevant that the Bank had taken a decision on its own risk assessment, preferring to be sued by Kuvera than being found by OFAC to have breached sanctions, without having objectively assessed the likelihood of the vessel having Syrian connections. 

Such a decision could not be justified simply because a sanctions clause had been inserted into the confirmed LC. The Bank still had to prove a breach of the sanctions referred to in the sanctions clause.

The vessel’s new registered owner was a Barbados entity, and her technical and ISM manager was a UAE entity. 

The key question before the Court was whether the bank had shown that the Omnia, under her new registered ownership, remained under Syrian beneficial ownership. 

Regarding this, the Court found that the Bank had not displaced the prima facie inference of ownership arising from a registered non-Syrian owner. 

It was not sufficient to suggest that just because information on her beneficial owner or the beneficial owners of her technical and ISM manager was not available, it must follow that there is some masking or concealment of beneficial ownership. 

The suggestion that a registered owner may be a shell company was inconclusive.

Legal analysis: The need for objective assessments

Certainty of payment continues to be a guiding touchstone and a bank seeking to withhold payment on account of sanctions would have to objectively show how the payment constitutes a breach of the applicable sanctions. 

It is clear that a subjective assessment by a bank through its own risk assessment is not sufficient (e.g., a decision justified by a preference to be sued by the beneficiary rather than being penalised by OFAC).

Critically relying on OFAC’s guidance might not in itself be sufficient to establish that objective requirement to justify non-payment. 

A sanctions clause construed by reference to an objective and identifiable set of laws which apply to the bank would be more certain, but would still erode some of the commercial certainty that LCs offer. 

This is because a breach of sanctions is not always clear-cut. Barring the unlikely instance of a decision from the courts of the relevant jurisdiction on the sanctions in question and on similar facts, questions of interpretation of the sanctions and their application to the facts are bound to arise.

Whether foreign sanctions are in fact breached can be a thorny question of applying the relevant sanctions laws to the facts.