Bank’s inability to establish identity of vessel owner results in inability to rely on sanctions clause
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The Court of Appeal found a confirming bank to be in breach of contract by declining to make payment under a confirmation to a letter of credit on the basis that a sanctions prohibition applied.
The decision was based on the bank’s inability prove that a sanctioned entity owned the vessel on which the cargo was shipped. Banks faced with similar circumstances may have to decide which they consider to be the greater risk: breaching sanctions regulations or breaching contractual obligations.
In Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A.  SGCA 28 (28 September 2023), the Singapore Court of Appeal ruled that a confirming bank to a letter of credit that had declined to make payment on the basis that a sanctions prohibition applied was in breach of its obligation where it could not prove that the vessel on which the goods were shipped was in fact owned by a sanctioned entity. It was not sufficient for the confirming bank to assert that the sanctions clause in the confirmation letter applied based on inconclusive evidence as to the identity of the beneficial owner.
The decision demonstrates that the Singapore courts will take a strict evidential approach to the question of contractual liability. Banks faced with similar circumstances may have to decide which they consider to be the greater risk: breaching sanctions regulations or breaching contractual obligations. Where a bank relies on an internal assessment on potential sanctions violations, unless it has objective evidence of a violation it may risk incurring liabilities if it declines to meet its contractual obligations on the basis of its assessment.
The plaintiff, a Singapore-incorporated company, had lent money to a seller of coal in Indonesia. The seller used the funds provided to purchase coal and on-sell it to a company in Dubai. The buyer agreed to pay for the coal by letters of credit which named the plaintiff as the beneficiary. The buyer procured letters of credit from a bank in Dubai as the issuing bank. The defendant, a bank incorporated in the US and operating in Singapore as a branch, was the advising and nominated bank.
The defendant subsequently became the confirming bank when it added its confirmations to the letters of credit. Its confirmations contained a sanctions clause in the following terms:
[The defendant] must comply with all sanctions, embargo and other laws and regulations of the U.S. and of other applicable jurisdictions to the extent they do not conflict with such U.S. laws and regulations (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents or for any related disclosure of information.
Such a clause was not contained in the terms of the letters of credit.
When the plaintiff presented complying documents to the defendant, the defendant sent the documents for sanctions screening to ensure compliance with US sanctions laws and regulations.
The screening process revealed the following facts:
- The coal had been shipped on a vessel called the Omnia.
- In 2015, that vessel had been called the Lady Mona and was beneficially owned by a Syrian entity.
- At the time of the letter of confirmation (i.e., 2019), the vessel had changed its name to the Omnia and was registered to a legal owner that was a Barbados entity. It was managed by a UAE entity.
- However, there was no information in the ship registry as to its beneficial ownership.
In the light of the vessel’s prior Syrian ownership, this lack of information as to its beneficial ownership was considered a red flag indicating that the vessel might still be beneficially owned by a Syrian entity, and accordingly subject to US sanctions. The defendant therefore informed the plaintiff that it was unable to make payment against the complying presentation.
The plaintiff accordingly brought a claim against the defendant for breach of contract for its failure to pay. It sought to argue, among other things, that the letters of credit did not have a sanctions clause and accordingly the defendant’s sanctions clause had not become a term of the confirmations.
The defendant succeeded in the High Court and the plaintiff appealed (read our update on the High Court decision). The Court of Appeal upheld the decision of the High Court as to its rulings on the law, but allowed the appeal on the facts, ruling that the defendant had failed to show that the vessel was in fact beneficially owned by a Syrian entity subject to sanctions.
The defendant failed to prove its defence on the facts
The Court of Appeal’s decision that the defendant had failed to prove the facts of its defence is the focus of this note.
We would briefly point out that the Court of Appeal upheld the High Court’s decision on the law relating to letters of credit. Specifically, it upheld the ruling that a confirming bank may offer to confirm on terms that are different from those of the letter of credit as a letter of credit and a confirmation are separate and distinct unilateral contracts. Accordingly, it is therefore possible that a confirming bank’s liability under a confirmation may be subject to conditions that are not reflected in a letter of credit.
Where the Court of Appeal differed from the High Court was whether the defence that the sanctions clause applied had been proven on the facts. The Court of Appeal made it clear that the defendant remained under a legal duty to prove its defence on the facts; in this case, this entailed satisfying the objective and long-standing test in law as to determining whether a bona fide change in ownership of the vessel had occurred.
The Court noted that the defendant had not presented any evidence that established that the beneficial owner of the Omnia was a Syrian entity. The fact that the registry did not provide evidence of beneficial ownership and the absence of information about the beneficial ownership of the owner and manager of the Omnia was inconclusive; it did not necessarily mean that there was concealment of her beneficial ownership. The Court also observed that while this might be considered a “red flag” for regulatory compliance purposes, this did not amount to legal proof which was the standard that applied in court. Further, while the Omnia appeared on JPMorgan’s internal “Master List” it was not on OFAC’s Specially Designated Nationals and Blocked Persons list.
Notably the Court of Appeal made it clear that “[i]n light of the ‘inconclusive’ evidence before the court, [it] did not think that [the defendant’s] decision based on its own risk-taking calculus to refuse payment to [the plaintiff] was sufficient to establish that the Omina was subject to ‘any applicable restriction’ under the Sanctions Clause. As such, [the defendant] was not entitled to invoke the Sanctions Clause to deny payment to [the plaintiff] upon a complying presentation of documents.”
Lastly, in this case while the defendant sought guidance from OFAC on whether a sanctions violation had occurred, the Court observed that in its correspondence with OFAC, the defendant was essentially “looking retrospectively to OFAC to justify its decision which, by its own admission, was based on inconclusive information as regards the beneficial ownership of the Omnia”.
In view of this conclusion, the Court of Appeal ruled that the defendant was liable to the plaintiff for breach of contract, and awarded damages.
Points for consideration
While the need for objective evidence of the applicability of sanctions laws may pose a risk to banks, banks may not, however, be able to deal with the risk by amending sanctions clauses to give a bank a wide discretion to refuse to honour a presentation of complying documents if it takes the internal view that there is a risk of breaching sanctions. While the Court of Appeal did not rule on this issue, it signalled its provisional agreement with the view of the High Court as to such clauses. The Court of Appeal stated that its provisional view was that such a clause would not be consistent with the system of documentary credits which are unique in that one autonomous contract within the transaction has the effect of securing the payment promised under another autonomous contract. They might not therefore be valid.
Accordingly, a bank that finds that its internal assessment is that it might be at risk of breaching sanctions if it were to make payment on a letter of credit will be faced with a difficult choice if it is unable to objectively ascertain that the relevant sanctions regulations are engaged. Under those circumstances, if it were to deny payment, it may be exposed to a claim of damages for breach of contract as occurred in this case. It may, however, have to weigh whether this would be the lesser risk than the risk of being in found to be in breach of sanctions regulations, which would expose it to a host of liabilities, not least of which would be criminal liability.