DCW maintains a list of recently-decided court cases involving commercial letters of credit, standby LCs, demand guarantees, and other trade
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This month we’re digging into the legal, operational, and regulatory tensions at the core of LC and guarantee practice.
“The ICC Guidance Paper on the use of Sanctions Clauses (2014) ... stated that the use of sanctions clauses had become a problematic issue in that they lead to uncertainty as to their application and may put into question the very effectiveness of the instrument in which they are drafted. They are non- documentary conditions for the purpose of the UCP and the URDG. ... “
“The Sanctions Clause does not come within the scope of the rule prohibiting non-documentary conditions and does not engage the purpose of that rule. The Sanctions Clause does not govern what the [beneficiary] must do in order to make a complying presentation under the letter of credit or under the confirmation. ... The Sanctions Clause operates post-presentation to permit the [confirming bank] not to pay the [beneficiary] against a complying presentation if the documents involve a vessel subject to the sanctions laws and regulations of the [USA]. That is a condition of payment, but is not a non- documentary condition of payment in the sense that that term is used as a term of art.
I therefore hold that the Sanctions Clause is not invalid or unenforceable on the ground that it is a non- documentary condition.”
“The ICC Guidance Paper on the use of Sanctions Clauses (2014) ... stated that the use of sanctions clauses had become a problematic issue in that they lead to uncertainty as to their application and may put into question the very effectiveness of the instrument in which they are drafted.1
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1 A previous edition of this Addendum contained a statement that sanctions clauses are non-documentary conditions for the purposes of the UCP and the URDG. This statement has been deleted, to avoid any implication that sanctions clauses are to be analysed differently from other clauses in trade finance instruments. Whether or not a sanctions clause is a non-documentary condition for the purpose of the UCP and the URDG will depend on the drafting of the clause: if it is drafted as a condition for a complying presentation under the letter of credit, the confirmation, the guarantee or the counter-guarantee without stipulating the document to indicate compliance with the clause, it could be considered as a non documentary condition for the purpose of article 14(h) of the UCP and of article 7 of the URDG. Conversely, if the sanctions clause is drafted as a term of payment, thus operating in certain circumstances to override the payment obligation and permit the obligor in the letter of credit, guarantee or counter-guarantee not to pay the beneficiary against a complying presentation, it could be permissible under the UCP/URDG. Validity and enforceability are to be determined under the applicable law.” [emphasis added]
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