This was an interesting letter of credit dispute recently resolved by the Courts of Singapore.
The Court of Appeal reversed the decision of the High Court, (Vinodh Coomaraswamy J) and ruled that the confirming bank could not rely on the sanction clause contained in the letter of credit. Sanctions have become very popular over recent times and this case shows some interesting angles of the law of letters of credit and the difficulties posed by the applicability of the sanction clause the confirming bank (JP Morgan Chase) had incorporated into his contract with the beneficiary (Kuvera Resources).
The First Instance judgment serves as a useful and illustrative reminder of the law on letters of credit, it explains this complex business transaction in the following terms:
A letter of credit transaction comprises five contracts
- The critical role that the letter of credit plays in facilitating the international sale of goods means that it is of fundamental commercial importance that the rights and obligations created by a letter of credit operate in a manner which is predictable, stable and reliable. To meet these commercial expectations, the law treats a letter of credit not as a single contract but as a compound transaction comprising up to five interconnected contracts (see Michael Brindle and Raymond Cox, Law of Bank Payments (Sweet & Maxwell, 5th Ed, 2018) at para 7-030).
- The first of these five contracts is between the buyer and the seller of the goods. It is typically in this contract that buyer and seller agree to use a letter of credit as their payment mechanism. The buyer will be the applicant for the letter of credit; the seller will be the beneficiary.
- The second contract is between the applicant and the issuing bank. This contract governs: (a) the issuing bank’s obligation to issue a letter of credit by which it undertakes to pay the beneficiary against a complying presentation; and (b) the applicant’s obligation to repay the issuing bank any sums which the bank pays the beneficiary.
- The third contract is between the issuing bank and the beneficiary. This contract governs the obligation which the issuing bank owes to the beneficiary to pay the beneficiary against a complying presentation. It is this contract which is the defining feature of a letter of credit, and which therefore lies at its legal and commercial core. It is therefore only this contract which should properly be called “the letter of credit”.
- The fourth contract is between the confirming bank and the beneficiary. This contract governs the obligation which the confirming bank owes to the beneficiary to pay the beneficiary against a complying presentation. This contract is referred to as the “confirmation”.
- The fifth contract is between the issuing bank and the confirming bank. This contract governs the issuing bank’s obligation to reimburse the confirming bank once the confirming bank has paid the beneficiary against a complying presentation.
- An applicant, a beneficiary and an issuing bank are essential in every letter of credit. The first three contracts are therefore always present in every letter of credit transaction. A confirming bank is not essential in a letter of credit transaction but is frequently used for commercial convenience and utility. The fourth and fifth contracts are therefore present only if the parties have agreed to use a confirming bank.
- The dispute between the parties in this action arises out of the fourth contract (the confirmation) and involves its interaction with the third contract (the letter of credit).
As to the resolution of the dispute the Court of Appeal reversing the High Court’s view decided the following:
We should mention that if the Sanctions Clause is to be construed as JPMorgan claims it should (ie, that JPMorgan is entitled to deny payment against a complying presentation as long as it finds that on a risk-based assessment, it would prefer to be sued by Kuvera than to risk being penalized by OFAC), then the Sanctions Clause would most likely be incompatible with the commercial purpose of the Confirmations due to the significant unpredictability such an interpretation would introduce into the Confirmations. Although we have construed the Sanctions Clause as requiring an objective determination as to whether the Omnia was subject to any applicable restriction, it would still have been unclear to Kuvera whether the Sanctions Clause would apply as it was not aware of the Omnia’s nomination at the time when JPMorgana dded its Confirmations to the two LCs and in any event, the Omnia’s alleged “Syrian nexus” would not have been apparent from the publicly accessible records. Therein lies the uncertainty facing a beneficiary like Kuvera as it would not know at the time it accepted the Confirmations whether the Sanctions Clause would apply to deny it payment. Intuitively, such uncertainty (which was entirely beyond the control of Kuvera) may run counter to the commercial purpose of a confirmed letter of credit which is to provide security to the beneficiary that it will receive payment so long as it is able to present the requisite complying documents.
For a reading of the full High Court judgment clic here
For a reading of the full C.A. judgment click here