UK: Is The Opening Of An L/C Pursuant To A Sale Contract Prohibited By International Sanctions Regulations?

Last Updated: 7 March 2012
Article by Max Cross and Reema Shour

Soeximex SAS v. Agrocorp International Pte Limited [2011] EWHC 2743 (Comm)

This dispute involved a consideration of US and EU Burmese Sanctions Regulations and whether they prevented the buyers of Burmese rice from opening a letter of credit pursuant to the payment provision in the sale contract. Although disputes in respect of the Burmese Sanctions Regulations do not crop up frequently, the discussion in this case surrounding the scope and interpretation of those Regulations will be relevant to traders affected by the more prevalent international trade sanctions against Iran, in respect of which the US, EU and UK have all enacted sanctions impacting on payment under affected international trade contracts, including by letter of credit.

The background facts

The disputed contract was for the sale and purchase of Burmese rice, origin Myanmar, by Singaporean sellers to French buyers. The rice was destined for delivery in Conakry, Benin, and payment under the contract was by irrevocable letter of credit ("L/C"), with the following express requirement:

"L/c to allow TT reimbursement from New York bank with account number details; third party documents and to be freely negotiable in Singapore for 30 days from ..."

The buyers failed to open the L/C by the required date and the sellers treated this as a repudiatory breach of contract and claimed damages. The buyers argued that they were relieved from performance because US and EU Burmese Sanctions Regulations made it illegal for them to open the L/C.

The GAFTA Board of Appeal held that both the US and EU Regulations relied on by the buyers applied to the sale contract but that the buyers had not established on the balance of probabilities that opening the L/C would violate the applicable US and EU Regulations so that the contract would be void for illegality.

The buyers appealed to the Commercial Court under Section 68 of the Arbitration Act 1996 (serious irregularity) on the grounds that the Board had not considered all relevant issues relating to the applicability of the sanctions and that consequently there was a material risk of injustice to the buyers.

The Regulations

The US Burmese Sanctions Regulations

In summary, the relevant provision of the US Regulations prohibits the "exportation or reexportation of financial services to Burma, directly or indirectly, from the United States or by a US person, wherever located", unless authorized by a license or permit from the Office of Foreign Assets Control ("OFAC"). The term "exportation or reexportation of financial services to Burma" is defined as "(a) the transfer of funds, directly or indirectly, from the United States or by a US person, wherever located, to Burma; or (b) the provision, directly or indirectly, to persons in Burma of ...banking services, ...letters of credit or other extensions of credit;...".

A US lawyer gave evidence before the Board that the US Regulations generally prohibited US persons from transacting most business involving Burma/Myanmar unless OFAC granted a license. More specifically, a New York bank would be considered to be exporting financial services indirectly to Burma in violation of the US Regulations if it reimbursed the buyers' issuing bank or the sellers' bank in the manner contemplated by the payment provision in the contract.

The buyers submitted that this meant the identity of the specific Burmese beneficiaries (on which the Board had concentrated) was irrelevant and that it was sufficient if there was an indirect supply of financial services to Burma (an issue which they said the Board had not considered). The buyers argued that had the Board considered this discrete issue, it might well have concluded that the contract was illegal.

Council Regulation (EC) No. 194/2008, as amended by Commission Regulation 385/2008

In broad terms, the EU Regulation lays down restrictions on imports and exports to and from Burma and on investment in Burma/Myanmar. Article 11 of the EU Regulation sets out a list of sanctioned persons and Article 14 provides that "the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with the Regulation, shall not give rise to liability of any kind on the part of the natural or legal person or entity implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen as a result of negligence...".

The buyers contended that the Article 14 defence was available not just to the banks but also to the buyers themselves, so that if the buyers acted in good faith in refusing to open the L/C, they would not be liable even if it transpired that their belief that they would be contravening the EU Regulation in doing so was wrong. They submitted that the Board had wrongly confined itself to considering whether the intended beneficiaries were listed persons under Article 11, instead of considering the Article 14 defence.

The sellers submitted that the Board in this case had dealt with all the relevant issues even if it may not have recorded its full reasoning in the award. It was important to distinguish between a failure to set out the tribunal's reasoning in relation to all the arguments advanced in the arbitration (no grounds for a S. 68 application) and a failure to deal with an essential issue argued before it (potential grounds for a S. 68 application).

The Commercial Court decision

Mrs Justice Gloster concluded that there had indeed been a failure by the Board to deal with all the issues put to it which, in the circumstances, amounted to a serious irregularity causing serious injustice to the buyers. So far as the US Regulations were concerned, there was clearly a separate argument that if a US bank were to issue, confirm or advise a letter of credit opened by a buyer of Burmese goods, or if it were to send US Dollars to reimburse a foreign bank's funding of any letter of credit issued for the purpose of paying for Burmese goods, that would be subject to the prohibition in the US Regulations irrespective of the identity of the specific or listed Burmese beneficiaries. The judge found that the Board had not addressed this issue.

In respect of the EU Regulation, the judge further found that the Board had not addressed the Article 14 defence and that there was clearly a reasonable argument under Article 14 to the effect that it would operate to absolve a contracting party acting in good faith (and not merely a bank or credit institution) from liability for failing to open an L/C and that it would do so in circumstances where the Regulation would not in fact have been breached if the L/C had been opened.

Comment

It is beyond the remit of this article to discuss in detail the parallels between Burmese and Iranian sanctions regulations. This case does, however, highlight the difficulties being faced by the international trading community in making payments under their contracts where sanctions legislation potentially applies.

The judgment is also of interest for the judge's comments on when the court will interfere with an arbitration tribunal's award. The judge indicated that the court tries to uphold arbitration awards and to read them in a sensible and commercial way. The court's role on a S. 68 application is not to pick holes in an award or to over-analyse the brief reasons given by the commercial arbitrators in respect of issues within their areas of expertise. In this case, however, there were legal issues which should have been addressed and had not been, so the correct way forward was to remit the award to the Board.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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