The ICC issue Addendum To The ICC Guidance Paper On The Use Of Sanctions Clauses ”
The issue of sanctions clauses in LCs and guarantees, seems to be a constant source for discussion. Likewise, sanctions clauses are still creating practical issues. There are literally thousands of different clauses out there being put into LCs and guarantees, and in many of those cases the clause may be challenged by the counterpart bank or beneficiary. All in all, regardless how good the reasons may be to include a sanctions clause, it is a fact that the mere existence of the clause may – and often will – disrupt the transaction flow. And of course, more troublesome, the wording of the clause may put into question the irrevocable and independent nature of the LC or guarantee.
This challenge is recognized by the ICC, who already back in 2010 published the “Guidance Paper on the Use of Sanction Clauses for Trade Related Products (e.g. Letters of Credit, Documentary Collections and Guarantees) subject to ICC Rules”. This document was updated in 2014. That version is available here:
https://iccwbo.org/publication/guidance-paper-on-the-use-of-sanctions-clauses-2014/
This Guidance Paper highlights the problems associated with the use of sanctions clauses in Trade Finance and recommended that banks should refrain from issuing Trade Finance- related instruments that include sanctions clauses that purport to impose restrictions beyond, or conflict with, the applicable statutory or regulatory requirements.
However, recently the ICC has noted a resurgence in the use of sanctions clauses in LCs and in demand guarantees, particularly in the form of non-specific clauses that create uncertainty. For that reason, the ICC today published an “Addendum to The Use Of Sanctions Clauses In Trade Finance-Related Instruments Subject To ICC Rules, Including Documentary And Standby Letters Of Credit, Documentary Collections And Demand Guarantees”. That document is available here:
Basically, the addendum recommends that banks review the Guidance Paper and the principles therein when considering the drafting of sanctions clauses.
In addition to that, in the addendum, the ICC (for the first time) offers a “sample clause”, namely the following:
“[notwithstanding anything to the contrary in the applicable ICC Rules or in this undertaking,] We disclaim liability for delay, non-return of documents, non-payment, or other action or inaction compelled by restrictive measures, counter-measures or sanctions laws or regulations mandatorily applicable to us or to [our correspondent banks in] the relevant transaction.”
The disclaimer from the ICC is that the above clause is a sample only and not to be used without seeking advice from legal and compliance advisors.
Likewise, the addendum includes a list of guidance (of a more practical nature than is available in the Guidance Paper). Those include (for the full story, the addendum should be consulted):
* Sanctions clauses should not be used routinely.
*Specific sanctions regulations may be referred to in the clause (e.g. sanctions administered and enforced by the Hong Kong Monetary Authority).
* Sanctions regulations may apply as mandatory, e.g. due to:
- The law applicable to the issuing bank (or branch)
- The law applicable to the currency of payment.
- The law governing the performance of the relevant undertaking
- International public policy where the arbitral tribunal or the court with jurisdiction
* Clauses should refrain from including unparticularised references to laws generally (e.g. “any applicable local and foreign laws”)
* Reference to “bank policy and procedure” should be avoided
* There are jurisdictions in which the local law prevents the inclusion of a sanctions clause that references the laws of a foreign jurisdiction
* The reference to correspondent banks should be added in a sanctions clause only if a correspondent bank is in a different location from that of the instructing bank
The issue of sanctions clauses remains a troublesome issue, but with the Guidance Paper (from 2014) – as well as the new Addendum, the ICC aim to guide banks in a good way. My personal take is that the main problem is the lack of standard when a bank is drafting a sanctions clause; i.e. banks will need to evaluate each and every clause; and some of them are very complex – to say the least. This is time consuming. Therefore, my hope is that the sample clause (quoted above) could be used by banks (who would otherwise include a sanctions clause) in general. This would take the top of the problem.
All for now, and as always, take care of the LC – but take special care of each other during these difficult times.
Kind regards
Kim