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JP Morgan vindicated in trade finance sanctions lawsuit

Singapore’s High Court has sided with JP Morgan after the bank was sued for refusing to pay a coal trader under a letter of credit (LC) because it believed doing so would have violated US sanctions laws.

In what the judge described as “a test case on the validity and enforceability” of so-called sanctions clauses, Singapore coal trader Kuvera Resources in 2020 filed a claim for up to US$2.42mn in damages from the US banking giant.

Kuvera advanced funds to an unnamed Indonesian company in July 2019 to buy and on-sell 35,000 metric tonnes of coal to a buyer in Dubai, requiring payment from the buyer in the form of two irrevocable LCs.

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JP Morgan was selected as the confirming bank for the LCs, which were issued by an unnamed bank in Dubai. But when the US bank submitted Kuvera’s documents to its sanctions screening process, it discovered that the vessel transporting the coal was likely Syrian-owned and therefore the transaction could be a breach of the sprawling US sanctions regime.

The US’ sanctions regulations on Syria include a broad prohibition on providing financial services to a Syrian entity, and a ban on facilitating or guaranteeing a transaction by a foreign company if the transaction would have been illegal if undertaken by a US entity.

JP Morgan had added a sanctions clause to the LC confirmations it sent to Kuvera which stated that it would not be liable for any failure to pay under the LC if doing so would put it at odds with US sanctions laws.

Among other arguments, Kuvera claimed in the suit that the clause did not constitute a term of its contract with the bank, that it didn’t negate the bank’s obligation to pay and was not valid, workable or enforceable.

But Judge Vinodh Coomaraswamy rejected all the trader’s submissions, finding that the bank was entitled to add the clause, to conclude that paying out would put it at risk of enforcement by the US Office of Foreign Assets Control (OFAC) and to refuse payment.

Sanctions clauses have become common in trade finance as sanctions laws in the US, Europe and other jurisdictions swell in volume and complexity. Banks have previously been slapped with eye-watering penalties for alleged violations, including JP Morgan, which was fined for apparent sanctions violations in 2011 and 2018.

The ruling “marks the first time a Singapore court considered the validity and enforceability of a sanctions clause, and provides important and timely guidance on the use and drafting of such clauses”, JP Morgan’s defence team at law firm Drew and Napier wrote after the written judgement was published on October 31. Judge Coomaraswamy dismissed Kuvera’s suit in February but did not provide his reasons until now.

Kuvera has filed an appeal against the decision, but hearings are yet to be held. It did not respond to a request for comment sent through Mahmood Gazvani Chambers, the law firm representing it in the case. Spokespeople for JP Morgan did not respond to requests for comment.

 

Better to be sued than fined

The judgement explains that when JP Morgan’s Singapore branch subjected the LC documents to sanctions vetting, it unearthed due diligence from 2015 that the Omnia, the vessel set to carry the Indonesian coal, was owned by Syria’s Ali Samin Group.

In February 2019 the vessel’s name was changed, its beneficial owner was listed as unknown, its registered owner appeared to be a Barbadian shell company and the beneficial owners of the ship’s technical manager – UAE company Serenity Ship Management – were also listed as unknown. Additionally, JP Morgan’s “searches on publicly available sources suggested that Omnia continued to have links to Syria”, according to the judgement.

Alisha Burke, from JP Morgan’s compliance department, gave evidence that the lender “took a risk-based decision in December 2019, following [Kuvera’s] complying presentation, that it would rather be sued by the plaintiff for failing to pay against a complying presentation than to be found by OFAC to have breached US sanctions”, according to the judge’s summary.

“Although this puts the bank’s risk analysis in the starkest of terms, it is nevertheless a wholly accurate reflection of the position in which US banks find themselves as a result of their obligation to comply with US sanctions,” Judge Coomaraswamy wrote. “I find this to be a rational and contractually justified approach.”

Kuvera argued that the bank must prove that, on balance, the Omnia was owned by a Syrian entity at the time of the transaction.

But the judge said that the sanctions clause referred to the entire US sanctions infrastructure, including OFAC’s guidance and expectations on how financial institutions adhere to the rules. Such guidance does not necessarily require banks to be absolutely sure that a company is owned by a sanctioned entity.

Much of Judge Coomaraswamy’s decision to dismiss Kuvera’s claim rested on his finding that an LC comprises several distinct and autonomous contracts between different parties, instead of what he referred to as a “fundamentally misconceived” view by Kuvera that an LC is a single contract between multiple parties.

He wrote that JP Morgan “made an irrevocable offer of a unilateral contract” when it added its confirmation – which contained the sanctions clause – to both LCs, which “was separate from and autonomous of” the offers of a contract made by the issuing bank when it issued the LCs.

“This is the fundamental point at the heart of the parties’ dispute, and one which the plaintiff has failed to grasp,” he wrote.

The judge also rejected Kuvera’s claim that the bank did not draw the sanctions clause to its attention during the confirmation process. The judgement says JP Morgan made it “objectively and abundantly” clear that the clause was a term of its confirmation and that the lender “did not in any objective sense conceal or ‘camouflage’ the sanctions clause in the confirmations, as the plaintiff alleges”.

Kuvera argued in court that the sanctions clause was not a term of the confirmations because the only contractually “operative” part of the confirmations was the first paragraph, which says the bank will pay out against the presentation of documents.

The judge responded: “If [Kuvera CEO] Mr [Arjan Bhisham] Chotrani chose to disregard the terms of the defendant’s offer beyond its first paragraph, his conduct is objectively unreasonable, and he did so at his own peril.”

Another argument deployed by Kuvera was that the sanctions clause should only have become a term of the confirmation if it was specifically negotiated by the parties.

In rejecting that line of attack, the judge found that the sanctions clause was a term of the confirmation like any other and it was up to Kuvera to agree to it, reject it or attempt to negotiate over it with the bank.

Other arguments by the trader that were dismissed by the judge include that the clause was so broad as to be unworkable, that it was invalid because it is a “non-documentary” condition and therefore incompatible with an LC and that it did not provide JP Morgan so much discretion that it undermines the irrevocable nature of an LC.

The judgement shows that in February 2020 Kuvera received a payment of US$2.2mn directly from the buyer of the coal, but took the court action to receive the same amount in damages, or the US$220,000 difference with what it would have received under the LC.

The post JP Morgan vindicated in trade finance sanctions lawsuit appeared first on Global Trade Review (GTR).

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