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- Title
A Critical Evaluation of the Use of Sanctions Clauses in Letters of Credit.
- Authors
Lupton, Cayle S.
- Abstract
With the sharp increase in sanctions-related compliance requirements and expectations over the last decade, banks have sought various methods to mitigate the legal risk of engaging sanctioned persons or entities. The inclusion of so-called sanctions clauses in commercial contracts is one such method. In this article the author explores the use of sanctions clauses specifically in letters of credit, a practice which appears to be gaining ground. More particularly, the article explores the issues associated with the non-documentary nature of sanctions clauses, as well as the question whether the mandate given by the issuing bank to the nominated bank in respect of a letter of credit containing a sanctions clause meets the requirements of a valid contract. The author contends that sanctions clauses militate against conventional letter-of-credit practice and seriously undermine the irrevocable nature of the issuing bank's payment obligations. This is especially the case when a reference is made in a sanctions clause to internal sanctions policies or a discretion of the issuing bank in relation to honouring the credit. Consequently, banks would be well-advised not to use sanctions clauses, but if contemplated, then a reference to internal policies or a discretion of the issuing bank must be avoided at all costs. This much is in alignment with the views of leading international organisations.
- Subjects
LETTERS of credit; EXCLUSIVE contracts; RISK-taking behavior
- Publication
Potchefstroom Electronic Law Journal, 2022, Vol 25, p1
- ISSN
1727-3781
- Publication type
Article
- DOI
10.17159/1727-3781/2022/v25i0a13897