Letters of Credit – New Uncertainties?
Benefits of Letters of Credit
Letter of credits (LC) are a common and useful instrument in international trade transactions. It operates through the banking system and is essentially based on payment being made by a buyer in exchange for stipulated documents being presented by the seller showing that the goods of the contracted quantity and quality have been despatched.
Under Singapore law, the bank owes a contractual obligation to the seller to honour an LC as long as it fulfils the stipulated requirements. The banks have a very limited scope to decline payment.
JTJB Managing Partner K. Murali Pany notes: “A key feature of LCs which facilitates international trade is certainty. Payment is via banks and as long as conforming documents are presented by the seller to the bank, payment by the bank will ordinarily follow.”
While payment can separately be stopped by an injunction from the Court, these are rare situations that would involve an element of fraud and/or unconscionability. A further exception exists where a beneficiary fraudulently presents the bank with documents that he/she knows to be untrue, also known as the ‘Fraud Exception’.
LCs therefore provide a measure of reassurance for both parties, especially between buyers and sellers who may not know each other well or are from different jurisdictions; the seller can expect to receive payment for its goods and the buyer can expect to receive the goods for which it has paid.
New Uncertainties
Winson Oil Trading Pte Ltd v Oversea-Chinese Banking Corporation Limited [2023] SGHC 220
However, in August 2023, the case of Winson Oil broadened the applicability of the Fraud Exception such that beneficiaries and companies may no longer be safe in relying on a defence that they did not know about false representations made. This effect of this case was explored in our recent article.
JTJB Counsel, Jolene Tan commented that “The case of Winson Oil does not appear to suggest any evidential threshold to meet to satisfy the reasonableness requirement. There also does not appear to be a trade-wide accepted checklist for a beneficiary to mark against in trades. To this, we can only suggest that beneficiaries apply their minds carefully as to the representations of fact which they can ascertain, to any extent, and carry out these checks as best as they reasonably can in the circumstances.“
Kuvera Resources Pte Ltd v JP Morgan Chase Bank, NA [2022] SGHC 213
In an earlier Insights article we explored the recent Singapore case of Kuvera Resources where JP Morgan had confirmed a letter of credit issued in favour of Kuvera and this letter of credit contained the following sanctions clause:
“[JPMorgan] must comply with all sanctions, embargo and other laws and regulations of the U.S. and of other applicable jurisdictions to the extent they do not conflict with such U.S. laws and regulations (“applicable restrictions”). Should documents be presented involving any country, entity, vessel or individual listed in or otherwise subject to any applicable restriction, we shall not be liable for any delay or failure to pay, process or return such documents or for any related disclosure of information.”
Subsequently, Kuvera presented documents relating to cargo laden on board a vessel, the OMNIA. JP Morgan conducted a search on the vessel, and the search revealed that there was a sanctions nexus or concern associated with the vessel.
It was undisputed that the vessel was not listed in any “applicable restrictions” and that JPMorgan could only invoke the sanctions clause if it could show that it was “otherwise subject to any applicable restriction”. JPMorgan argued that there was an “unresolved possibility” that the vessel might be caught under “any applicable restriction” upon which JPMorgan would be entitled to decline payment.
The Singapore High Court decided that the foreign sanctions clause was valid and enforceable and thus, JPMorgan’s refusal to make payment under the letter of credit was justified in this case.
However, the Singapore Court of Appeal (CA) recently overturned the lower court’s decision.
Commenting on the case, Pany concludes: “The Singapore High Court allowed JPMorgan’s argument but the Singapore Court of Appeal subsequently rejected it, finding that the text of the sanctions clause had to be read strictly. The “unresolved possibility” that JPMorgan sought to rely on was not good enough. The takeaway from this case is that sanctions clauses will be construed strictly and should therefore be crafted carefully and comprehensively to enable such situations to be managed.”
Potential Issues
Concerns have been expressed that these cases have affected the fundamental value of LCs which is certainty of payment against conforming documents.
Parties in transactions that utilise LCs should be aware of these uncertainties and take steps such as:
- Ensuring that clauses and documentary requirements in LCs are clear and precise;
- Exercising greater caution prior to presenting documentation for payment under an LC, including ensuring that they have in their records any relevant trail which would assist in confirming the truth or veracity of any representation made in the conforming documents;
- Applying (if the above is not possible) their minds carefully as to the representations of fact which they can ascertain, to any extent, and carry out these checks as best as they reasonably can in the circumstances.
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