Sanctions Clauses – Here to Stay, so How to Deal with Them?

The proliferation of sanctions since the 1960s – and the long reach jurisdiction which the Office of Foreign Assets Control (OFAC) has used to enforce US sanctions abroad – has contributed heavily to the widespread use of “sanctions clauses” by banks attempting to limit their exposure to pay in certain circumstances where they risk being in breach of sanctions from applicable jurisdictions. Such clauses have become regular features in letters of credit. These clauses vary from informative wording which merely restates the obligation of a financial institution to abide by the law to declarations which seek to permit an issuing or confirming bank to refuse to pay based on the bank’s internal policy. The appearance of such extreme versions of these latter types of clauses prompted the ICC to publish guidance in 2014 aimed at discouraging the use of sanctions clauses in LCs. UCP600 itself says nothing of sanctions or how they apply to LCs.

However, sanctions clauses are here to stay. In 2020 the ICC issued revised guidance suggesting that sanctions clauses may be “non-documentary conditions” and could perhaps be ignored, only to adjust its stance in 2024. Some interesting legal developments on sanctions and sanctions clauses have arisen in courts recently which will cause that guidance to be reviewed.