1. Interpreting a sanctions clause: Lamesa Investments Ltd v. Cynergy Bank Ltd [2020] CA EWCA Civ 821

This case involved the interpretation of a sanctions clause in an English law-governed Facility Agreement between Lamesa Investments Ltd (Lamesa) and Cynergy Bank Ltd (Cynergy), under which Cynergy was obliged to make interest payments to Lamesa.

Lamesa’s parent company was wholly owned by an individual who was subsequently designated by the U.S. Office of Foreign Assets Control (OFAC), and as a result Lamesa became a “blocked person” by virtue of its ownership structure and was also subject to U.S. secondary sanctions. The central issue raised in the case was whether Cynergy was entitled to refuse to make interest payments to Lamesa on the grounds that to do so might cause it to become the target of U.S. secondary sanctions.

Clause 9.1 of the Facility Agreement provided that Cynergy would not be in default if its failure to pay was “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”. Cynergy sought to invoke clause 9.1 to justify its refusal to make interest payments to Lamesa.

Commercial Court judgment

In a first instance judgment of the Commercial Court, the judge (HHJ Pelling QC) held that Cynergy’s failure to pay interest was excused by clause 9.1 of the Facility Agreement, due to the risk that the interest payments could cause Cynergy to become the subject of U.S. secondary sanctions.

In the judge’s view, the words “mandatory provision of law” in clause 9.1 meant “a provision of law that the parties cannot vary or dis-apply” or “that could not be derogated from”, and not only (as argued by Lamesa) a provision of law that directly prohibited a party from taking a particular step, and therefore, in the opinion of the judge, included the U.S. secondary sanctions to which Cynergy was exposed.

The judge had particular regard to what he considered were the parties’ intentions in agreeing to clause 9.1, finding that the parties were aware at the time of the Facility Agreement that it was possible that U.S. sanctions would be imposed on Lamesa and that, in agreeing to clause 9.1, the parties had intended to address the risk of secondary sanctions being imposed against Cynergy. This was particularly the case because Cynergy (as a non-U.S. person) did not face a risk of contravening primary sanctions. The judge held that the parties would not have agreed to a clause that addressed only a risk (i.e., that relating to primary sanctions) that Cynergy did not face.

Court of Appeal judgment

Lamesa appealed to the Court of Appeal. Lamesa argued that the judge had been wrong because:

• the U.S. secondary sanctions to which Cynergy was exposed did not expressly prohibit Cynergy from making payment or bind Cynergy to act or not act in a particular way, such that Cynergy could not say that it had refused to pay “in order to comply with [a] mandatory provision of law” within the meaning of clause 9.1;
• the judge had been wrong to interpret clause 9.1 as if it were a one-off negotiated provision – and thereby having regard to what the judge considered to be the parties’ intentions in agreeing to the clause – when, in reality, the clause was a standard clause that appeared in many finance agreements;
• it would require clear wording to enable a debtor under a loan agreement to escape its fundamental payment obligations, and the wording of clause 9.1 was insufficiently clear to do so; and
• the court had to take account of the commercial interests of both parties in interpreting the contract, and not only those of Cynergy as the judge had apparently done.

Whilst the Court of Appeal dismissed Lamesa’s appeal and upheld the first instance decision, it did so based on somewhat different reasons to those of the judge in the lower court. The Court of Appeal’s reasons as set out in the lead judgment of Sir Geoffrey Vos, chancellor of the High Court, are instructive as to the approach that the English courts can be expected to take to the interpretation of sanctions clauses.

In interpreting clause 9.1, the Court of Appeal applied principles established under the leading authorities on contractual interpretation, which are summarised below:

• The court should construe the relevant words of a contract in their documentary, factual and commercial context, assessed in the light of (i) the natural and ordinary meaning of the provision being construed, (ii) any other relevant provisions of the contract being construed, (iii) the overall purpose of the provision being construed and the contract or order in which it is contained, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.
• In arriving at the true meaning and effect of a contract, the departure point in most cases will be the language used by the parties, and where the parties have used unambiguous language, the court must apply it.
• Where the language used by the parties is unclear, the court can properly depart from its natural meaning where the context suggests that an alternative meaning more accurately reflects what a reasonable person with the parties’ actual and presumed knowledge would conclude the parties had meant by the language.
• If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other.
• In striking a balance between the indications given by the language and those arising contextually, the court must consider the quality of drafting of the clause and the agreement in which it appears. Sophisticated, complex agreements drafted by skilled professionals are likely to be interpreted principally by textual analysis unless a provision lacks clarity or is apparently illogical or incoherent.

The Court of Appeal confirmed that contractual interpretation is a “unitary exercise”, starting “with the words and relevant context”, before moving “to an iterative process checking each suggested interpretation against the provisions of the contract and its commercial consequences”. The court must consider the contract as a whole, against its wider context, before reaching a conclusion on its objective meaning.

The Court of Appeal held that, since the words of clause 9.1 were ambiguous, it was relevant to consider the context to the clause and the question of business common sense.

Four aspects of context that were considered relevant were:

• First, that clause 9.1 used similar language to the EU Blocking Regulation, which regards U.S. secondary sanctions as imposing a “requirement or prohibition”. These terms must be taken to have been known to the parties and to the drafters of this standard clause.
• Second, that the Court of Appeal considered that clause 9.1 was a standard term that was in common usage at the time that the Facility Agreement was entered into. Where this is the case, less weight should be given in the contractual interpretation process to the contextual evidence of the factual background or matrix. Instead, the focus should be “ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of input and continuing review of users of the standard forms and knowledge of the market”.
• Third, that, at the relevant time, U.S. secondary sanctions would have been one potential problem affecting parties to agreements such as the Facility Agreement and, for the reasons the judge gave, far more likely to be a potential problem than U.S. primary sanctions.
• Fourth, that clause 9.1 did not extinguish the entitlement to be paid interest and repaid capital under the Facility Agreement – it merely provided that Cynergy would not be in default for non-payment. Clause 9.1 therefore affected the timing of payments rather than the question of whether payments would ever be made. This was an important factor when considering Lamesa’s submission that clear words were needed to abrogate a payment obligation, because clause 9.1 did not abrogate the payment obligation; it abrogated only a default and merely delayed the payment obligation.

On the application of business common sense to the construction of the clause, the Court of Appeal held that clause 9.1 was intended to be used by international banks, which faced the risks of dealing with the prospect of U.S. secondary sanctions. If the words “mandatory provision of law” only referred to a provision that directly prohibited the borrower from paying, it would have almost no possibility of taking effect.

For these reasons, the Court of Appeal dismissed Lamesa’s appeal and held that clause 9.1 was engaged by the risk of U.S. secondary sanctions against Cynergy.

Commentary: The case is a reminder that the risk of a party being subject to secondary sanctions may be brought into the scope of a sanctions clause by appropriate drafting, although the particular words used by the parties in this case were held to be ambiguous and capable of multiple meanings. Ultimately, the interpretation that aligned most closely with the parties’ assumed intentions based on business common sense was preferred.

2. Sanctions and trade finance: Kuvera Resources Pte Ltd v. JPMorgan Chase Bank [2023] SGCA 28

In Kuvera Resources Pte Ltd v. JPMorgan Chase Bank [2023] SGCA 28, the Singapore Court of Appeal considered the applicability of sanctions to letters of credit (LCs) and whether the evidentiary threshold for invoking a sanctions clause had been met by a bank.

In this case, LCs were issued in respect of the prices of cargoes of coal in favour of the claimant, Kuvera, as beneficiary. JPMorgan added its confirmations to the LCs, which included the following sanctions language:

“[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 U.S. 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.”

The vessel carrying the coal was alleged by JPMorgan, based on its own vessel screening exercise, to be beneficially owned by a Syrian entity that was designated by OFAC. Although Kuvera had made a compliant documentary presentation, JPMorgan refused to make payment on the grounds that it was entitled to refuse to do so under the sanctions wording above.

In the Singapore High Court, it was held that the sanctions clause was valid and enforceable. The court was furthermore satisfied on the evidence that JPMorgan would have breached U.S. sanctions restrictions had it paid Kuvera.

The Court of Appeal overturned the High Court judgment and held that JPMorgan was not entitled to rely on the sanctions clause to justify non-payment to Kuvera.

Key issues considered by the Court of Appeal were:

• The validity and interpretation of the sanctions clause in the context of LCs.
• Whether JPMorgan’s internal sanctions screening, which flagged the vessel as a risk, justified non-payment under the sanctions clause.
• The distinction between JPMorgan’s internal sanctions screening and the official OFAC List.
• The broader implications of these findings on the independence and commercial purpose of the LCs.

Kuvera argued that the sanctions clause was not engaged as the vessel was not designated since it was not on the OFAC List, and that JPMorgan’s refusal to pay was therefore unjustified. Kuvera contended that LCs should provide assured payment unless clear, objective criteria for sanctions risks are met.

JPMorgan maintained that its internal risk assessments and the resultant inclusion of the vessel on its list of sanctioned vessels were sufficient grounds to invoke the sanctions clause and refuse payment, citing the necessity to comply with U.S. sanctions laws as interpreted through its internal policies.

The court found that JPMorgan’s internal sanctions screening, which placed the vessel on a bank-specific “Master List”, was not equivalent to an official determination under the OFAC List. This distinction was critical since the OFAC List represents a legal benchmark for sanctioned entities, whereas JPMorgan’s list was based on internal risk assessments.

The court emphasised the need for an objective standard when invoking the sanctions clause. It held that JPMorgan’s internal determinations, while perhaps prudent from a risk management perspective, did not meet the necessary legal threshold for denying payment under the established principles of documentary credit transactions.

The court ultimately sided with Kuvera, concluding that JPMorgan was not entitled to rely on its internal sanctions screening process to trigger the sanctions clause. It determined that without objective evidence of the vessel being subject to applicable U.S. sanctions, as per OFAC standards, the refusal to pay was unjustified. Consequently, Kuvera was awarded damages for the unpaid sums under the LCs and additional related expenses.

Commentary: The judgment highlights the necessity to establish a clear evidentiary basis to invoke a sanctions clause, and that – depending upon the triggers defined under the clause – even material risks identified under internal sanctions policies may not be sufficient to trigger a right to invoke the clause.

3. Suspended payments and accrual of interest: Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited [2020] EWCA Civ 145

On 12 February 2020, the Court of Appeal handed down its decision in Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. International Military Services Limited.

The Court of Appeal dismissed the appeal from the Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran (MODSAF), confirming that where a debtor owes a sum of money to an EU-sanctioned entity, interest will not accrue on that sum while the entity to whom the debt is owed remains subject to sanctions, even if there is a court order or judgment, or an arbitration award, against the debtor.

This confirmation provides further reassurance to companies that have refused to make payments to EU-sanctioned entities, and also some clarity on the purpose, language and proportionality of asset-freezing measures. That said, companies should note that the Court of Appeal acknowledged that a designated person with an appropriate EU account could be credited with interest and in certain instances, companies may have to make payments into blocked accounts.

In his judgment, Lord Justice Newey examined Article 38 of EU Council Regulation 267/2012, focusing on its objectives and terminology and assessing the impact of non-accrual of interest on fundamental property rights. He disputed the argument that Article 38 aims only to prevent access to funds, not to confiscate them, indicating its protective purpose for parties affected by sanctions-imposed non-performance. Lord Justice Newey also clarified that while arbitration awards and judgments are not “contracts or transactions”, they relate to these for enforcement purposes, aligning with Article 38’s scope.

Additionally, the ruling addressed the proportionality of restricting interest accrual, linking it to the principle that sanctions should burden designated persons, not their counterparts. The acknowledgment that a designated person with an appropriate EU account might receive interest underscores a nuanced stance on asset freezing, balanced between sanction enforcement and contractual fairness.

Commentary: The Court of Appeal’s judgment confirmed that, where an entity subject to sanctions under the EU Council Regulation 267/2012 does not have a qualifying EU bank account, despite the fact of a court order or judgment, or an arbitration award, its counterparties will not be required to pay interest on any such order, judgment or award, for the period during which that entity remains sanctioned.

We note that this case relates to pre-Brexit legislation. Although it is likely that the English courts will apply this concept to the post-Brexit equivalent text, the UK now has an autonomous sanctions regime. This case also does not address the situation where an entity subject to sanctions under the Regulation has a qualifying EU bank account.

Whilst this case deals with the position under the Regulation, a separate question is how the English courts would consider a situation where a party claimed interest on amounts that have been suspended pursuant to a sanctions clause. As late payment and interest clauses are typically drafted without cross-reference to sanctions provisions, the accrual of interest on suspended payments may continue notwithstanding that the payment obligation is suspended, depending on the proper construction of the terms of the contract.

4. What constitutes “control” under the Russia (Sanctions) (EU Exit) Regulations 2019?: Mints & Others v. PJSC National Bank Trust & Another [2023] EWCA Civ 1132

The Court of Appeal judgment in Mints & Others v. PJSC National Bank Trust & Another [2023] EWCA Civ 1132 (Mints) on 6 October 2023 considered a number of fundamental concepts under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), and secondary sanctions regulations made thereunder, in particular the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations).

The claimant banks had brought claims for US$850 million against the defendants for allegedly conspiring with representatives of the banks to enter into uncommercial transactions with companies connected with the defendants.

Whilst the litigation was ongoing, Russia invaded Ukraine in 2022 and the Regulations came into effect. The first claimant, PJSC National Bank Trust (NBT), was not designated directly by the Regulations, but the defendants argued that it was subject to an asset freeze because it was “owned or controlled” (within the meaning of Regulation 7) by at least two persons subject to asset freezes under the Regulations: President Vladimir Putin and Ms Elena Nabiullina, the governor of the Central Bank of Russia.

The Court of Appeal considered (among other issues) the question of whether a designated person “controls” an entity within the meaning of Regulation 7 where the entity is not a personal asset of the designated person, but the designated person is able to exert influence over it by virtue of political office.

Regulation 7(4): the test for “control” under the Regulations

Under Regulation 7(4), a person who is not an individual (C) is owned or “owned or controlled directly indirectly” by another person (P) when either or both of the following two conditions are met. The first condition is that P:

• holds (directly or indirectly) more than 50% of the shares or voting rights in C; or
• holds the right (directly or indirectly) to appoint or remove a majority of the board of directors of C.

The second condition is that it is reasonable, having regard to all the circumstances, to expect that P would be able (if P so chose), in most cases or in significant respects, and through whatever means whether directly or indirectly, to achieve the result that the affairs of C are conducted in accordance with P’s wishes.

The implications of a person being “owned or controlled” by a person subject to asset freeze restrictions under the Regulations is that the latter person will also be subject to similar asset freeze restrictions.

The parties’ arguments

The claimant banks conceded that, if control extended to control via political office, the control test would be satisfied in relation to NBT, pursuant to Regulation 7(4), in that either Putin or Ms Nabiullina could exercise influence over it in significant respects. However, the claimants argued that “control” did not extend to control by virtue of political office, arguing that, by this measure of control, President Putin would control every Russian company, which they contended would be an absurd interpretation.

Obiter comments of Sir Julian Flaux C

Sir Julian Flaux C, who wrote the leading judgment, addressed the “control” test under SAMLA and the Regulations, albeit that his comments were obiter, given his determination on the other grounds of appeal, but his views followed a four-day hearing and consideration of a reasoned High Court judgment on the point from Cockerill J. In the views of Sir Julian Flaux C:

• NBT was indeed “controlled” by Putin and Ms Nabiullina within the meaning of Regulation 7(4) because they were each able to exercise control over NBT by virtue of the political office they held.
• This construction was consistent with the plain language of the Regulation, which is cast in wide terms and does not have any limits as to the means or mechanism by which a designated person is able to achieve the result of control over a company, namely, that the affairs of the company are conducted in accordance with such person’s wishes.
• The finding of Cockerill J at first instance that there was an implied carve-out of political control from the Regulations should be rejected – if Parliament had intended to carve out political control from the test for control, such a carve-out would have been expressly addressed in the Regulations, which it was not.
• If the defendants were correct that the consequence of this construction of the Regulation might well be that every company in Russia was potentially “controlled” by Putin and hence subject to sanctions, then the remedy was not for the court to put a gloss on the language of Regulation 7 to avoid that consequence, but for the executive and Parliament to amend the wording of the Regulations to avoid such a consequence.

Following this judgment, there was considerable concern in the market as to the apparently broad ambit of the “control” test under Regulation 7 as interpreted by the Court of Appeal in this case. However, this concern was tempered by the judgment in Litasco as well as by the UK government’s subsequent clarificatory guidance, both of which are considered below.

Litasco SA v. (1) Der Mond Oil and Gas Africa SA (2) Locafrique Holding SA [2023] EWHC 2866 (Comm)

In this case, issues again arose around the meaning of “control” under the Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations) in the context of transactions with entities that were alleged to be “controlled” by sanctioned persons.

The facts

In April 2021, Litasco SA (Litasco) entered into a contract to supply crude oil to Der Mond Oil and Gas Africa SA (Der Mond). When Der Mond failed to fulfil certain of its payment obligations, Litasco sued for the outstanding amount and applied for summary judgment.

Given that Litasco was wholly owned by a Russian oil company, Lukoil PJSC (Lukoil), Der Mond argued that it was prohibited from paying Litasco under Regulation 12 of the Regulations, which prohibited making “funds directly or indirectly available to a designated person”, including “any person who is controlled directly or indirectly by a designated person”.

Neither Litasco nor Lukoil was a designated person under the Regulations; however, Der Mond argued that Litasco was controlled by designated persons, including Vagit Alekperov (the CEO of Lukoil until April 2022) and President Vladimir Putin.

Judgment

On the question of “control” under the Regulations, Mr Justice Foxton held that making funds available to Litasco did not amount to making funds indirectly available to Putin because it was “wholly improbable” that the payment of Der Mond’s debt would be used in accordance with Putin’s wishes. Putin could not be deemed to control Litasco because he was “wholly ignorant” of Litasco’s existence.

The defendants had failed to provide evidence that Litasco was under Putin’s de facto control, noting that Litasco is not state-owned or an organ of the Russian state. The court acknowledged the theoretical possibility of Putin exerting control over Litasco or its assets but distinguished this potential control from actual control as defined within the Regulations.

The judgment leaned towards interpreting Regulation 7(4) as concerning actual influence over a company’s affairs, not a hypothetical ability to exert control. In conclusion, the court determined that there was no substantial argument that Putin controlled Litasco under Regulation 12.

The decision in Litasco emphasises the need to establish “control” on a case-by-case basis. It focuses the control test on actual, de facto control, rather than hypothetical control. Contrasted to Mints, Foxton J interpreted Regulation 7(4) as concluding that a designated person must exert existing influence over the relevant affairs of a company, rather than such person simply being in a position to bring about a state of affairs in relation to that company.

Commentary: The cases of Mints and Litasco articulate conflicting interpretations of the “control” test under the Regulations.

Foxton J noted that in the Mints case, NBT was 99% owned and controlled by the Central Bank of Russia, whose board members’ appointments needed to be approved by Putin. Therefore, it was not necessarily surprising to the Foxton J that NBT was considered to be subject to de facto control by Putin.

Shortly after the decision in Litasco was handed down, the Foreign, Commonwealth and Development Office (FCDO) and the Office of Financial Sanctions Implementation (OFSI), released joint guidance seeking to provide clarity on the meaning of “control” within the Regulations.

FCDO/OFSI guidance dated 17 November 2023 (the Guidance)

The Guidance provided clarification to the market on the question of “control” by public officials who are designated under the Regulations over both (a) public bodies and (b) private entities, as follows:

• Public officials and control of public bodies: The FCDO does not generally consider designated public officials to exercise control over a public body in which they hold a leadership function, such that the affairs of that public body should be considered to be conducted in accordance with the wishes of that individual.
• Public officials and control of private entities: There is no presumption on the part of the UK government that a private entity is subject to the control of a designated public official simply because that entity is based or incorporated in a jurisdiction in which that official has a leading role in economic policy or decision-making. Further evidence is required to demonstrate that the relevant official exercises control over that entity under UK sanctions regulations.

Furthermore, the Guidance provides specific guidance that, for the purposes of Regulation 7(4), “the UK government does not consider that President Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the Russian Presidency. A person should only be considered to exercise control over certain private entities where this can be supported by sufficient evidence on a case-by-case basis.”

Commentary: The Guidance also states that companies should ensure that they undertake risk-based due diligence and screening, the type and scale of which should be specific to the particular circumstances of the entity, to help mitigate any sanctions risks.

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