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The English Court of Appeal handed down judgment in the case of Lamesa Investments Limited v. Cynergy Bank Limited [2020] EWCA Civ 821 on 30 June 2020.

The Court of Appeal upheld the High Court’s decision that U.S. sanctions targeting Lamesa Investments Limited’s (LIL) ultimate owner justified Cynergy Bank Limited’s (CBL) withholding of interest payments on a £30 million loan from LIL. Our full review of the background to this case and first instance decision can be found at reedsmith.com.

Authors: Brett Hillis Leigh T. Hansson Ray-Shio Ho Eli Rymland-Kelly Nicole Cheung

Appeal issues

In the High Court decision, HHJ Pelling QC held that (i) CBL’s non-payment fell within the scope of clause 9.1 of the facility agreement between CBL and LIL (FA), which provided that a party “shall not be in default if … such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction” (Clause 9.1); and (ii) that clause effectively excused CBL’s obligation to pay interest by virtue of the risk of its actions causing it to become subject to the U.S. secondary sanctions.

The issue raised on appeal was whether the judge at first instance was right to hold that CBL was justified in refusing to pay interest to LIL. The case is of interest to anyone drafting or interpreting a provision of an agreement that grants a party rights if another party is affected by some form of illegality, including illegality clauses and sanctions clauses.

The Court of Appeal decision

The Court of Appeal dismissed LIL’s appeal and concluded that the judge at first instance had made the correct order. However, the Court of Appeal did not agree entirely with the judge’s reasons, and highlighted two factors relevant to the proper interpretation of Clause 9.1 that it considered the judge had overlooked.

First, Clause 9.1 was a standard term in common usage at the time of the FA. Therefore, contrary to the reasoning by the judge at first instance, contextual evidence of the factual background or matrix should be given less weight in the interpretation process. Instead, the focus “is ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market”.

Second, the focus should not have been on the parties’ probable intentions in the drafting of Clause 9.1. In this regard, whilst the context of the FA that led to the inclusion of the standard term was relevant, that had to be considered with regard to two more general considerations.

  1. Clear words would be required to establish a common intention that CBL would not meet its repayment obligation under the FA, where there was merely a risk that payment would incur a sanction, without having to show that the payment was prohibited as a matter of law.
  2. The court must always take into account the commercial interests of both parties when construing commercial contracts. In this instance, the Court of Appeal suggested that the judge at first instance may have focused more on the commercial interests of CBL than of LIL.

Applying the principles of contractual interpretation set out in Wood v. Capita Insurance Services Ltd [2017] 2 WLR 1095, the Court of Appeal clarified that the process of interpretation required was a unitary exercise, which “starts with the words and relevant context, and moves to an iterative process checking each suggested interpretation against the provisions of the contract and its commercial consequences”. Further, the court must consider the contract as a whole as well as the elements of the wider context before coming to a conclusion on its objective meaning.