English Court Upholds American Sanctions as a “Mandatory Provision of Law”

In a recent decision, the Court of Appeal held that a borrower was entitled to withhold interest payments to its lender where (1) the relevant contract between the two parties permitted the borrower to withhold payment in order “to comply with any mandatory provision of law”, and (2) the lender had subsequently become a blocked person under US sanctions regarding Russia. The case is Lamesa Investments Limited v Cynergy Bank Limited^[1].

The appeal concerned the interpretation of a Facility Agreement between Lamesa (as lender) and Cynergy (as borrower). Some months after that agreement, the US government’s Office of Foreign Asset Control (“OFAC”) listed the owner of Lamesa as a Specially Designated National ("SDN"); that therefore rendered Lamesa a blocked person under the same sanctions regime, and Cynergy argued that it could no longer make the agreed payments lawfully under the Facility Agreement, which was governed by English law. 

In September 2019, the High Court decided in favour of Cynergy, finding that US secondary sanctions were effectively a “mandatory provision of law” under UK contract. Lamesa appealed the decision, but the Court of Appeal upheld the High Court's decision. This decision is important for anybody doing business with or in high-risk markets; it is both a helpful clarification of the English court’s approach to a complex and fast-moving area of law, and a cogent reminder to exercise particular care in drafting relevant contracts. 

Background

In late 2017, Cynergy Capital Limited (“Cynergy”) borrowed £30 million from Lamesa Investments Limited (“Lamesa”), pursuant to a facility agreement.

In April 2018, Mr Viktor Vekselberg, the ultimate beneficial owner ("UBO") of Lamesa's BVI registered parent company, was added to the OFAC list of SDNs.

Due to US secondary sanctions regarding Russia, a non-US person located anywhere in the world can expose itself to liability if they knowingly facilitate a "significant financial transaction" on behalf of any person included on the SDN list. It was on these grounds that Cynergy ceased the repayment of interest because the Facility Agreement provided for such non-payment in order to comply with "any mandatory provision of law, regulation, or order of any court of competent jurisdiction."

The High Court found that the clause was sufficiently broad to include US secondary sanctions as a mandatory provision of law and therefore found in favour of Cynergy, entitling it to suspend its payments under the Facility Agreement, for the period in which Lamesa's UBO remained subject to US sanctions. Lamesa challenged that decision before the Court of Appeal.

The Court of Appeal ruling

Dismissing Lamesa’s arguments, the Court of Appeal held that Cynergy was complying with US secondary sanctions by suspending its payments, and that those sanctions were a mandatory provision of law.

The Court did note that the clause was drafted ambiguously and, therefore, that a strict interpretation of the clause could mean the parties had only intended to excuse a default where the non-payment was prescribed or required by a law binding on the borrower. Notwithstanding this, the Court found that “context and commercial common sense” should prevail in the circumstances of this case, and it found that Lamesa was complying with a mandatory provision as envisaged by the Facility Agreement.

In summary, the Court held:

1. The clause was intended to be used by international banks, institutions which frequently have to navigate the complexities of US secondary sanctions. If a "mandatory provision of law" only referred to one that directly bound the borrower not to pay, it would have almost no possibility of taking effect in practical terms.^[2]
2. The effect of US secondary sanctions was one of prohibition. The Court took the view that this position is made clear by the EU Blocking Regulation, which regards US secondary sanctions as imposing a "requirement or prohibition" on EU entities.^[3] 
3. While US legislation cannot prohibit, and does not purport to prohibit, a payment by Cynergy to Lamesa, the effect is clearly one of prohibition. Once the US legislation is seen as an "effective prohibition", Cynergy's reason for non-payment was to comply with it.^[4]

Case comment

This case provides welcome clarity, and indeed perhaps some comfort, particularly for non-US financial institutions, as to how the court will interpret "mandatory provision of law" clauses, especially where an express reference to US sanctions is not included. In practice, it is an important reminder as to the need for carefully drafted sanctions clauses, particularly where there is a risk of US, or indeed other, economic sanctions.

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^[1] [2020] EWCA Civ 821, handed down on 30 June 2020

^[2] At para 43.

^[3] At para 44.

^[4] At para 45.