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The issue of sanctions being applied upon a documentary credit transaction has surfaced on a number of occasions over the years.

ICC Opinion TA.752rev3 covered one such example.

A credit was confirmed and complying documents were subsequently presented. However, four days after presentation, the EU Council issued a sanction which added the issuing bank to a list of persons and entities subject to restrictive measures including freezing of funds and prohibiting funds being made available.

At the time of advising the credit, the confirming bank had modified its confirmation wording by adding a clause that it undertook no obligation to pay if there is involvement by any person (natural, corporate or governmental) listed in the USA, EU, UN or local sanctions lists.

Two questions were raised:

• In view of the fact that the issuing bank was only added to the EU sanction list after presentation of documents, does this still relieve the confirming bank of its obligations under UCP 600?
• Does the addition of the ‘sanctions' clause by the confirming bank relieve such bank of its obligations under UCP 600 to honour or negotiate?

This query was the subject of much discussion between ICC National Committees, ultimately leading to three revisions of the formal Opinion.

The content of the final published Opinion reinforced the position that UCP is overridden by any mandatory laws to which a bank may be subject; in this respect, directly applicable economic sanctions are generally considered as being mandatory.

It is apparent that banks have a legal duty to abide by applicable mandatory economic sanctions.  This is the case regardless of the content of a documentary credit or UCP. Should there be a dispute on the application of particular sanctions, then this must be submitted to a competent court.

In response to the initial questions it was stated:

• A bank may decline to honour or negotiate under its undertaking where economic sanctions that are applicable to it by law or regulation specifically prohibit it from doing so.
• The content of the sanctions clause was not in line with that recommended by the ICC in its guidance paper 470/129rev dated 19 February 2010. It is for the beneficiary to question the confirming bank as to the scope of a sanctions clause appearing in a confirmation advice and, where the beneficiary deems appropriate, to seek legal advice as to whether such a clause is enforceable.

For reference purposes, it should be noted that the guidance paper has now been superseded by document no. 470/1238 dated 20 August 2014 - this can be located at http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2014/Guidance-Paper-on-the-use-of-Sanctions-Clauses-2014/

More detailed information on this topic can be found in our ‘Sanctions' training module.

www.tradefinance.training