Debate persists on when an independent undertaking is issued: upon leaving the issuer’s control or only when advised to the beneficiary. Various rules clarify issuance timing.
Counter Guarantor’s Sanctions Clause: How Does It Impact The Guarantor?
A DCW reader asked about the impact of a specific clause in a counter guarantee issued by a US bank under ISP98 and Saudi law. This clause raises concerns about the presentation of documents and potential payment restrictions
A DCW Reader Writes: May I have your opinion on the following query:
A Counter Guarantor Bank issued its Counter Guarantee in favor of a Guarantor (Bank). The Counter Guarantee is subject to ISP98, whereas the Guarantee that will be issued by the Guarantor is subject to Saudi Law.
Guarantee is payable against presentation of a simple demand.
The Counter Guarantor (domiciled in USA) incorporated the following paragraph in their Counter Guarantee indemnity:
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PRESENTATION OF DOCUMENT(S) THAT ARE NOT IN COMPLIANCE WITH THE APPLICABLE ANTI-BOYCOTT, ANTI-MONEY LAUNDERING, ANTI-TERRORISM, ANTIDRUG TRAFFICKING, EXPORT DENIAL OR ECONOMIC SANCTIONS LAWS, REGULATIONS OR ORDERS IS NOT ACCEPTABLE. APPLICABLE LAWS VARY DEPENDING ON THE TRANSACTION AND MAY INCLUDE UNITED NATIONS, UNITED STATES AND/OR LOCAL LAWS.
a) What is the impact of this paragraph on the document (simple demand)?
b) Is there any requirement of a document/certificate that should be presented by the Guarantor to the Counter Guarantor in the event that there is a call for payment?
I am aware of the ICC Guidance Paper on the Use of Sanction Clauses for Trade Related but am unsure if it is useful in this situation.
DCW Responds: The ICC Paper discourages inclusion of such clauses in independent undertakings but this Paper is not binding on anyone, nor can it change the fact that banks are subject to local regulations and must comply with them.
This clause merely puts the bank on notice of this point. If the documents presented as the local bank under the counter standby violate any applicable US regulation (which would include terrorist financing, drug financing, payment to someone on the list of persons or companies to whom payment cannot be made, etc.), then the bank is prohibited from making payment. Since the demand would typically state that payment was demanded by the local beneficiary of the local undertaking, the issue would only arise to the extent that the details of the payment were apparent from the documentation presented which would include the name of the local beneficiary, any details about the underlying transaction, and any other information available. This information would be apparent from the counter standby if not the simple demand.
To avoid difficulties, one should also monitor the local beneficiaries to ascertain that they and the local transactions are not prohibited by Saudi regulations.
The applicability of Saudi law does not affect the fact that the issuer of the counter standby is subject to the laws of the country in which it operates.
Comments to all queries posed are not necessarily those of DCW and are not provided as legal advice. If legal advice or other expert assistance is required, the service of a competent professional should be sought.
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SANCTIONS CLAUSES: WHAT’S YOUR EXPERIENCE?
The Institute of International Banking Law & Practice (IIBLP) takes no position on whether or not an LC should contain a so-called "Sanctions" clause but, if one is to be included, suggests consideration of the following two lines of text:
We disclaim liability for delay, non-return of documents, non-payment, or other action or inaction compelled by a judicial order or government regulation applicable to us.
This "sanctions" language is publicly available on the IIBLP website and has been periodically discussed at industry conferences during the past five years. Variations have also been used. For instance some banks operating in one country, constrained by the need to conduct processing in another country through service providers, have added bracketed language “[or our service providers]” at the end of this clause.
In addition, at least one bank is utilizing language which is similar to the IIBLP clause. In December 2010, the bank stated it is taking the following into use:
“Due to sanctions decided upon by UN Security Council and USA, and regulations imposed by EU and local law, [Bank] disclaims liability for any delay, non-return of documents, nonpayment or other action or inaction compelled by law or regulation, a judicial order or a government regulation applicable to us.”
What has been your experience? There are plenty of examples of sanctions language that specialists have found unacceptable or otherwise problematic. Have you encountered examples of satisfactory language? Alternatively, is the best approach to use no sanctions language at all? Let us know. Responses may be e-mailed to: info@iiblp.org.
When issuing banks insert complex reimbursement terms and self-serving conditions into their credits, it distorts the purpose of the product, causes problems for confirming banks, and drives exporters away from using LCs.
Sanctions clauses that are wisely or imprudently constructed continue to be inserted into trade finance instruments and may heavily impact the legal rights and transactional obligations of involved parties.
