In this article, guest contributor Cayle Lupton discusses the legal and practical implications of financial sanctions on letters of credit, drawing on two landmark appellate decisions from England and Singapore.
The views and opinions expressed in this article are those of the author for educational purposes and do not necessarily reflect the official policy or position of ICC Academy or the International Chamber of Commerce.
Financial sanctions have become an inescapable feature of the contemporary regulatory environment. As jurisdictions respond to geopolitical instability, terrorism financing, and proliferation risks, sanctions frameworks are routinely embedded in the operating conditions of banks, corporates, and financial intermediaries across the world.
Letters of credit – a critical payment mechanism in international trade – are increasingly implicated in this compliance landscape. The result is a tension between the certainty and predictability of letter-of-credit undertakings and the obligation of financial institutions to comply with domestic and foreign sanctions regimes.
Two recent appellate decisions – Celestial Aviation Services Ltd v UniCredit Bank GmbH [2024] EWCA Civ 628 (in England) and Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28 (in Singapore)) – illustrate the legal and practical implications of sanctions on trade finance practice.
Both judgments effectively affirm that the efficacy of letters of credit must be preserved, while acknowledging that sanctions cannot be treated as peripheral to trade finance.
They also serve as valuable guidance for banks, traders, and legal practitioners on how letter-of-credit obligations should be understood and managed in an era of intense sanctions enforcement.
Trade finance and sanctions risk | An overview
The operation of a letter of credit depends on its key structural features: its autonomy from the underlying contract and its reliance on documentary compliance. The issuing or confirming bank’s obligation is independent from the underlying sale or financing contract – payment is triggered not by the performance of the underlying transaction, but by the presentation of compliant documents.
As set out in Article 4 of UCP 600, this independence is essential to the commercial purpose of letters of credit, creating a secure and predictable payment undertaking that facilitates the movement of goods across borders.
In practice, letter-of-credit transactions typically involve additional layers, including confirmations, reimbursement undertakings, and guarantees. These interconnected instruments mean that a sanctions event may not arise only at the level of the issuing bank – it may affect a confirming bank, nominated bank or correspondent bank anywhere in the payment chain, including banks located in the jurisdiction of the payment currency.
Modern sanctions frameworks, particularly those administered by Office of Foreign Assets Control (OFAC) in the United States, impose wide-ranging obligations on banks, often with extraterritorial effect. Sanctions may therefore prohibit or restrict payments connected with designated persons, certain categories of goods or technologies, specific jurisdictions, or transactions involving particular vessels or entities.
These developments expose tensions between banks’ regulatory duties and their contractual undertakings under letters of credit. Commercial parties sometimes assume that sanctions automatically excuse payment – but this assumption is unfounded. Whether a bank is legally prohibited from paying depends on the precise wording of the applicable sanctions legislation, the governing law of the letter of credit, and the terms of any contractual sanctions clause.
Where these elements do not align, banks may face significant commercial, reputational, and regulatory risk at the very moment payment is due.
Certified UCP 600 Specialist (CUCP)
Preserving the integrity of the letter of credit
The “integrity” of the letter of credit broadly refers to the reliability, predictability, and independence of the bank’s undertaking. Courts worldwide have consistently held that the letter of credit’s commercial purpose would be undermined if banks or applicants were permitted to raise broad defences to payment.
The only universally established ground for refusing payment is fraud, though illegality and unconscionability (also referred to as bad faith) have been recognised as separate defences in certain jurisdictions. Even so, these grounds operate within strict parameters. It is trite that beneficiaries must be able to rely on timely payment once compliant documents have been presented – the so-called “pay first, argue later” rule in letter-of-credit law.
Sanctions considerations challenge this traditional framework. Courts may be required to determine whether sanctions constitute a form of illegality or impossibility that justifies non-performance of payment obligations under letters of credit.
This is rarely a straightforward determination and turns on the specific circumstances of each case. While courts must consider applicable sanctions law and regulations, they must also remain alert to the risks that sanctions introduce to trade finance practice. The task is to balance letter-of-credit obligations with the legitimate need to ensure regulatory compliance – without allowing sanctions to erode the assurance of payment that letters of credit are designed to provide.
If sanctions were treated as a broad and indeterminate defence, the systemic consequences would be severe. Beneficiaries would face meaningful risk of non-payment, banks would be exposed to unpredictable legal and regulatory liability, and the utility of letters of credit as secure trade finance instruments would be fundamentally compromised.
Courts must therefore minimise friction between sanctions and established letter-of-credit jurisprudence in a manner that preserves the centrality of documentary compliance and honours the commercial expectations of the parties.
Celestial Aviation Services Ltd v UniCredit Bank GmbH [2024] EWCA Civ 628
The Celestial Aviation litigation concerned several letters of credit issued by Sberbank in favour of Irish aircraft leasing companies and confirmed by UniCredit’s London branch.
The choice of law clause provided for English law and payment was denominated in US dollars. When the beneficiaries presented compliant documents following the termination of the underlying aircraft leases, UniCredit declined payment on the basis that UK sanctions regulations – specifically Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations – prohibited the provision of financial services connected with the making available of restricted goods, including aircraft intended for use in Russia.
Regulation 28(3)(c) reads as follows:
“(3) A person must not directly or indirectly provide financial services or
funds in pursuance of or in connection with an arrangement whose object or effect is —
[…]
(c) directly or indirectly making restricted goods or restricted technology available –
(i) to a person connected with Russia, or
(ii) for use in Russia […].”
Licences were subsequently obtained from the EU and UK sanctions authorities and the principal sums were paid, but disputes relating to interest and costs remained. The English High Court held that the sanctions provisions did not apply and that UniCredit’s reliance on the Regulation was not reasonable for purposes of the statutory defence under section 44 of the Sanctions and Anti-Money Laundering Act 2018.
The Court of Appeal took a different view. It adopted a broad interpretation of the regulatory language, holding that payment under the letters of credit was “in connection with” an arrangement involving restricted goods, and therefore prohibited. On this basis, the court concluded that UniCredit had a lawful excuse for refusing payment and that the bank’s belief in the need to comply with the Regulations was reasonable.
The court also examined whether US sanctions could have created an additional prohibition by virtue of the payment being denominated in US dollars. While it held that it was unnecessary to decide the point, it observed that UniCredit had not taken adequate steps to obtain a licence under US law. This underscores the important principle that a bank seeking to rely on sanctions must demonstrate concrete engagement with the relevant regimes, including licence applications and regulatory communications.
The Celestial Aviation decision illustrates the consequences of sanctions law and regulation that directly prohibit payment. Equally, the judgment effectively endorses the expectation that banks must act diligently and transparently when invoking sanctions-based defences.
Kuvera Resources Pte Ltd v JPMorgan Chase Bank, N.A. [2023] SGCA 28
The Kuvera Resources case concerned two confirmed letters of credit issued in support of an Indonesian–UAE coal transaction. JPMorgan Chase Bank’s Singapore branch acted as advising, nominated, and confirming bank. The confirmations contained a sanctions clause providing that JPMorgan would not be liable for delay or failure to pay if the documents involved a vessel or entity subject to sanctions or other applicable restrictions. The clause read as follows:
“[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 US 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.”
When Kuvera, as beneficiary, presented conforming documents, JPMorgan refused payment on the basis that sanctions screening had identified potential links between the vessel and historical Syrian ownership. The vessel was not listed on any OFAC sanctions lists at the time of screening and had been renamed, with ownership transferred years earlier. Nevertheless, the bank maintained that the lack of clarity surrounding beneficial ownership justified withholding payment.
The Singapore High Court accepted this position, interpreting the sanctions clause as permitting JPMorgan to act on its own assessment of sanctions risk. The Court of Appeal of Singapore disagreed. It held that JPMorgan had to provide objective evidence that the vessel was subject to sanctions, emphasising that red flags and internal risk assessments are not sufficient grounds to refuse payment under a confirmed letter of credit. Allowing subjective discretion of this kind would, in the court’s view, fundamentally undermine the commercial purpose of confirmations by introducing unpredictability into the payment undertaking.
The Court of Appeal thus required a high standard of proof, aligning the treatment of sanctions clauses with the rigor traditionally applied to the fraud defence in letter-of-credit law. The decision reinforces a clear principle: banks cannot decline payment on the basis of a subjective sanctions risk assessment. They must objectively establish that the transaction falls within the scope of an applicable sanctions regime.
Brief case law analysis
The appellate judgments in Celestial Aviation and Kuvera Resources collectively reveal a shared commitment to preserving the integrity of letters of credit. Both courts recognised the importance of certainty and predictability in the letter-of-credit system and the need to carefully manage the uncertainty that sanctions concerns can introduce – even where conforming documents have been presented.
The two cases differ, however, in the nature of the sanctions dispute. In Celestial Aviation, the bank relied on domestic sanctions regulations that expressly prohibited performance where restricted goods were involved. The English Court of Appeal accepted that sanctions could excuse non-performance in those circumstances.
By contrast, in Kuvera Resources, the defence rested on a contractually incorporated sanctions clause coupled with internal risk assessments, rather than an external legal prohibition. The Singapore Court of Appeal’s insistence on objective evidence highlights the limits of contractual mechanisms when they threaten to erode certainty in letters of credit.
Taken together, both judgments signal that courts will not permit sanctions to function as a broad, discretionary escape from letter-of-credit obligations – while equally acknowledging that sanctions cannot be dismissed as commercially irrelevant. This balance may represent a developing transnational consensus: sanctions can excuse payment only where a clear legal prohibition exists, or where, in the case of a sanctions clause, objective evidence proves a genuine sanctions breach. Anything short of this threshold risks undermining the commercial value and assurance provided by letters of credit.
The appellate decisions are likely to influence lower courts, arbitral tribunals, and trade finance practice worldwide, potentially encouraging clearer drafting and more disciplined compliance processes.
Drafting and transactional structuring
The practical lessons from these cases extend to the drafting and structuring of transactions.
Sanctions clauses, where deemed necessary, should be framed in precise and objective terms. Clauses that grant a bank broad discretion, rely on ambiguous standards, or incorporate internal policies risk being invalidated or narrowly construed by courts. Clarity is essential, both to preserve letter-of-credit functionality and to ensure that parties understand the circumstances in which payment may lawfully be withheld.
Parties should also consider how sanctions risk is allocated. This includes identifying whether delays arising from sanctions screening or licensing processes fall on the applicant, the beneficiary, or the bank. Facility agreements, reimbursement undertakings, and related security instruments should be harmonised with the letter of credit to avoid conflicting obligations. Where sanctions exposure is foreseeable, licensing mechanisms and temporary suspensions may be built into the transaction structure at the outset.
Beyond contractual drafting, internal processes play an important role.
Banks should maintain updated screening systems aligned with current official sanctions lists, implement clear escalation procedures, and ensure timely legal review of potential sanctions issues. Beneficiaries, too, should understand how sanctions clauses operate in practice and are well advised to address potential compliance concerns early in the transaction cycle.
Certified Trade Finance Professional (CTFP)
Dispute resolution strategies and forum choice
Sanctions-related disputes highlight the importance of careful forum selection. Jurisdictions may adopt varying approaches to defences to payment, making the choice of governing law and dispute resolution forum consequential. Arbitration may offer confidentiality and procedural flexibility, but courts may be better positioned to interpret complex sanctions regulation – particularly where regulatory engagement or licensing processes are involved. Parties must consider which forum is most capable of producing timely and predictable decisions.
When sanctions restrict performance, both banks and beneficiaries must act promptly. This includes preserving contractual rights, documenting compliance steps, communicating with regulators, and taking interim measures to mitigate risk.
Effective dispute resolution strategies depend on early assessment of the legal and regulatory framework governing the transaction, including any foreign sanctions that may apply by virtue of the payment currency or the involvement of correspondent banks.
Key takeaways for trade finance practitioners
The increasing scope of financial sanctions has placed significant pressure on traditional trade finance instruments. Yet, the jurisprudence emerging from the Celestial Aviation and Kuvera Resources cases demonstrates that courts remain resolutely committed to safeguarding the integrity of letters of credit.
Sanctions can excuse payment, but this is not absolute. Banks must rely on concrete legal prohibitions and objective evidence, while beneficiaries cannot assume that sanctions will be dismissed as commercially irrelevant.
The broader message for the trade finance community is that sanctions risk must be addressed through clear drafting, strong internal governance, and effective transactional structuring, rather than through reactive reliance on broad sanctions defences.
As sanctions frameworks continue to evolve, the dual imperatives of regulatory compliance and commercial predictability will remain central to maintaining trust in the letter-of-credit system and ensuring the continued stability of international trade.
