Can Confirming Banks Rely on a Sanctions Clause in a Confirmation to Refuse to Honour a Complying Presentation?

The commercial purpose of a confirmed documentary letter of credit is to provide assurance to the beneficiary that it will receive payment against presentation of complying documents. The addition of the confirming bank in the letter of credit transaction is often due to the beneficiary’s discomfort with the issuing bank, whether for reasons of creditworthiness or otherwise. Where a confirming bank seeks to rely on a sanctions clause to refuse to honour a complying presentation, what is the standard of proof it must meet in order to discharge its burden to invoke such a clause? The recent Singapore Court of Appeal (“CA“) in Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28 (“Kuvera“) sheds light on this important issue.

In Kuvera, the confirming bank relied on a sanctions clause in its confirmations to refuse to honour an otherwise complying presentation on the basis that the goods had been shipped onboard a vessel which was allegedly subject to US sanctions laws. Before the High Court, the bank successfully argued that it was entitled to rely on the sanctions clause by applying a risk-based approach, which on the facts of Kuvera meant that it would suffice for the confirming bank to establish inter alia that the relevant authority (in this instance, the US Office of Foreign Assets Control) would have found the bank to be in breach of the relevant US sanctions had it made payment to the beneficiary under the letters of credit.

On appeal, however, the CA found that the confirming bank could not bring itself within the operation of the sanctions clause. The CA emphasised that the issue of whether the vessel was subject to sanctions was to be determined objectively, rather than by reference to speculative elements under the bank’s risk-based approach, for instance a determination by a third party such as OFAC.

In this Update, we cover the background of the dispute, the key points made by the High Court and the CA, and the implications Kuvera has for banks and beneficiaries of confirmed letters of credit.