Lamesa Investments Limited (LIL) is a company registered under the laws of the Republic of Cyprus. LIL is wholly owned by Lamesa Group Incorporated, a company registered under the laws of the British Virgin Islands, which is in turn wholly owned by a U.S. ‘Specially Designated National’ (SDN).
Cynergy Bank Limited (CBL) is a retail bank registered under the laws of England and Wales. The only connection CBL has with the United States is its U.S. dollar business and the maintenance of a U.S. dollar correspondent account with a U.S. bank.
LIL and CBL entered into a facility agreement in 2017 (FA) whereby, among other things, LIL loaned £30 million to CBL and CBL was contractually obliged to make interest payments twice each year during the term of the FA. The FA was governed by English law and subject to the exclusive jurisdiction of the English courts.
Main issue – risk of U.S. secondary sanctions
As a result of the SDN ownership of LIL, LIL became a “blocked person”. As CBL is not a U.S. person, U.S. primary sanctions prohibiting U.S. persons from dealing with blocked persons do not apply to CBL. However, the U.S imposes secondary sanctions, which target non-U.S. persons and companies even where there is no U.S. nexus (i.e., the use of U.S. dollars, U.S. persons or U.S. goods). Consequently, if the U.S. government were to determine that the payment of interest to LIL under the FA is “a significant financial transaction”, it could impose sanctions on CBL.
Due to this secondary sanctions risk, CBL relied on Clause 9.1 (Non-payment) of the FA to refrain from making interest payments to LIL. Clause 9.1 provided that CBL “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” [emphasis added].
It was determined that at the time of the negotiation and completion of the FA, the parties were both legally represented and were aware of the risk of CBL becoming subject to secondary sanctions.
Matter of construction of Clause 9.1
The common law position is that the English courts will not excuse contractual performance by reference to foreign law unless that law governs the contract or is the law of the place of performance.2 However, the parties can provide in the contract for the different treatment of sanctions risks.3 Therefore, the question before Judge Pelling QC was whether Clause 9.1 of the FA effectively changed the common law position with respect to the U.S. secondary sanctions risk.
The construction of Clause 9.1 turned on the following phrases:
- “regulation or order of any court of competent jurisdiction”;
- “any mandatory provision of law”; and
- “in order to comply”.
Judge Pelling QC decided that because the definition of the word “regulation” and the phrase “any court of competent jurisdiction” had no territorial qualification, it would be inconsistent to construe the reference to “mandatory provision of law” as being confined to English law.
On the meaning of “mandatory”, it was decided that this means a “provision of law that the parties cannot vary or dis-apply”. As neither party could dis-apply the U.S. statutes imposing secondary sanctions, it would fall within the scope of “mandatory provision of law”.
The real issue lay with the interpretation of “in order to comply”. Judge Pelling QC explained that there are at least three possible applicable permutations that are not mutually exclusive:4
- compliance arises only in relation to a statute that expressly prohibits payment by imposing sanctions or penalties;
- compliance occurs where a party acts or refrains from acting to avoid being subject to a sanction or penalty imposed by legislation; and/or
- compliance occurs where a party acts or refrains from acting to avoid the possibility of being subject to a sanction or penalty imposed by legislation.
In light of the expansive definition of “mandatory” and the factual and commercial context, it was determined that the ambit of Clause 9.1 was not intended to exclude any permutation. In particular:
- the parties were or should have been aware of the risk of U.S. secondary sanctions;
- at the time of negotiation of the FA, OFAC’s FAQ guidance was clear that the default position would be that the sanctions would generally apply; and
- Clause 9.1 is deliberately drafted widely to eliminate the risk of ‘double jeopardy’ on CBL and to protect CBL from the risk of breaching express or implied prohibitions against payment that would expose it to potentially severe penalties or sanctions.
Accordingly, it was held that Clause 9.1 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 risk that existing sanctions clauses would not excuse parties from taking, or refraining to act to avoid, the risk of becoming subject to U.S. secondary sanctions has recently become a significant issue and parties have been concerned about whether their existing sanctions clauses need to be re-opened or renegotiated.
In light of this uncertainty, Judge Pelling QC’s judgment is a welcome clarification on the application of sanctions clauses to manage U.S. secondary sanctions risk under English law. Although the judgment is premised on the ‘contextual’ issues listed above, such a factual and commercial matrix is common to many contractual parties these days, especially if they are legally represented.
The determination around the territorial ambit of “regulation or order of any court of competent jurisdiction”, though unsurprising, is of particular interest as many sanctions clauses have similar widely drafted wording or ‘catch all’ provisions. Contractual parties should therefore take note of the territorial scope of sanctions wording to ensure the intended management of sanctions risk is properly aligned with the contractual language.
-  EWHC 1877 (Comm).
- See Ralli Brothers v. Campania Naviera Sota Y Aznar  2 KB 287, Kleinwort Sons & Co v. UBIA  2 KB 678 at 694-5, and Libyan Arab Foreign Bank v. Bankers Trust Co  1 QB 728 at 743.
- See National Bank of Kazakhstan and another v. Bank of New York Mellon  EWCA Civ 1390, at ,  and  to .
- See Cope v. Rowlands  2 M & W 150 at 157, and Phoenix General Insurance Co of Greece SA v. Halvanon Insurance Company Limited  1 QB 2216, at 268 C-G.
Client Alert 2019-229