A Critical Evaluation of the Use of Sanctions Clauses in Letters of Credit

Authors

DOI:

https://doi.org/10.17159/1727-3781/2022/v25i0a13897

Keywords:

letter of credit, issuing bank, payment, sanctions, sanctions clauses

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.

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Author Biography

Cayle Lupton, University of Johannesburg, South Africa

Assistant Lecturer of Law, University of Johannesburg, South Africa and Attorney of the High Court of South Africa

References

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Published

27-10-2022

How to Cite

Lupton, C. (2022). A Critical Evaluation of the Use of Sanctions Clauses in Letters of Credit. Potchefstroom Electronic Law Journal, 25, (Published 27 October 2022) pp 1 – 29. https://doi.org/10.17159/1727-3781/2022/v25i0a13897

Issue

Section

Special Edition: Festschrift - Charl Hugo