A critical evaluation of the use sanctions clauses in letters of credit

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With the sharp increase in sanctions-related compliance requirements and expectations over the last decade, banks have sought various methods to mitigate the legal risk of engaging sanctioned persons or entities. The inclusion of so-called sanctions clauses in commercial contracts is one such method. In this article the author explores the use of sanctions clauses specifically in letters of credit, a practice which appears to be gaining ground. More particularly, the article explores the issues associated with the non-documentary nature of sanctions clauses, as well as the question whether the mandate given by the issuing bank to the nominated bank in respect of a letter of credit containing a sanctions clause meets the requirements of a valid contract. The author contends that sanctions clauses militate against conventional letter-of-credit practice and seriously undermine the irrevocable nature of the issuing bank's payment obligations. This is especially the case when a reference is made in a sanctions clause to internal sanctions policies or a discretion of the issuing bank in relation to honouring the credit. Consequently, banks would be well-advised not to use sanctions clauses, but if contemplated, then a reference to internal policies or a discretion of the issuing bank must be avoided at all costs. This much is in alignment with the views of leading international organisations.

Original languageEnglish
JournalPotchefstroom Electronic Law Journal
Publication statusPublished - 2022


  • Issuing bank
  • Letters of credit
  • Payment
  • Sanctions
  • Sanctions clauses

ASJC Scopus subject areas

  • Sociology and Political Science
  • Law


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