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US extra-territorial sanctions can be a "mandatory provision of law" for the purposes of English law contracts


United Kingdom, United States

The Court of Appeal has ruled in Lamesa Investments Limited v Cynergy Bank Limited [2020] EWCA Civ 821 that US secondary sanctions fell within the definition of a "mandatory provision of law" that operated as a carve-out permitting non-payment of sums due under a facility agreement.

The case involved a UK bank, Cynergy, which borrowed £30 million from Lamesa, a Cypriot company, under an English law facility agreement.
While the facility agreement itself had no US nexus (nor was there any other US nexus), Cynergy maintained a US correspondent account to carry out a substantial part of its business. Clause 9 of the facility agreement provided that Cynergy would not be in default for failure to pay any sums due to Lamesa, 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".
A short while after the facility agreement was signed, the ultimate beneficial owner of Lamesa's parent company, a Russian national called Viktor Vekselberg, was listed by the US government's Office of Foreign Assets Control (OFAC) as a Specially Designated National (SDN), rendering Lamesa a "blocked person".
The US sanctions regime against Russia has extraterritorial effect, meaning secondary sanctions can be imposed on non-US persons who facilitate payments to a blocked person. Secondary sanctions can include a non-US person becoming a designated party itself and/or the non-US person being blocked from opening or maintaining a correspondent account in the US.
Given Cynergy's reliance on its US correspondent account and the fact a significant part of its business was denominated in US dollars, Cynergy relied on clause 9 of the facility agreement to withhold the payment of interest instalments that had fallen due, arguing that it was doing so to comply with a mandatory provision of law, i.e., US secondary sanctions.
The High Court decision
Lamesa brought a claim against Cynergy for non-payment on the basis that US secondary sanctions did not compel a non-US person to stop making payments, and that it was not certain whether Cynergy would be subject to secondary sanctions if it continued to make payments.
They further argued that the word "mandatory" only extended to a law applying to UK parties, acting in the UK, that have agreed to make a sterling payment under a contract governed by English law, and would not encompass US sanctions.
The High Court took the view that a "mandatory provision of law" meant a law that the parties were not able to vary or disapply by contract. As neither party would be able to disapply the US secondary sanctions, they would be considered a mandatory provision of law.
As such, Cynergy's refusal to pay did not constitute an act of default.
The Court of Appeal decision
Lamesa appealed the High Court decision arguing that US secondary sanctions did not contain an express legal prohibition on payment and therefore did not require Cynergy to act or not act in a particular way.
The Court of Appeal upheld the High Court's decision (albeit for slightly different reasoning), finding that Cynergy was complying with US secondary sanctions by suspending payment, and that it was not in default for non-payment as the US secondary sanctions were a mandatory provision of law.
It stated that the words "mandatory provision of law" could refer either to a law directly requiring Cynergy not to pay the sums due, or a law which amounted to an actual or implied prohibition on Cynergy.
The court held that the effect of US sanctions was one of prohibition, and in doing so relied upon the terms of the Blocking Regulation which regards US secondary sanctions as imposing a "requirement or prohibition" with which EU parties are otherwise required to "comply."
The terms of the Blocking Regulation would have been known to the parties at the time of drafting the facility agreement. It was not necessary for Cynergy to establish that it would actually be sanctioned if it made a payment to Lamesa, as what mattered was Cynergy's reason for withholding payment.
Once US secondary sanctions legislation is seen as an "effective prohibition", Cynergy's reason for non-payment was to comply with it, and Cynergy was therefore entitled to rely on the "mandatory provision of law" clause.
The court also relied on the fact that the clause was a standard term intended to be used by international banks in a loan agreement for Tier 2 capital. Tier 2 capital is an EU concept, subject to EU regulations.  
US secondary sanctions would have been just one potential problem affecting parties to agreements for the provision of Tier 2 Capital within the EU. The parties must have intended the borrower to be capable of obtaining relief from default if its reason for non-payment was to "comply" with a foreign statute that would otherwise be triggered.
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. As such the clause extended to allowing Cynergy to suspend payment, not only to comply with English law, but also to comply with any other system of law that would affect its ability to conduct its ordinary business, therefore encompassing US secondary sanctions legislation.
Impact of the decision
This judgment provides welcome clarity as to how the court will interpret "mandatory provision of law" clauses, particularly where there is no explicit reference to US secondary sanctions.
It is also a timely reminder of the importance of including specifically tailored sanctions clauses.
The judgment illuminates the risks around differing interpretations of standard clauses, and that the ultimate interpretation of a clause will be heavily fact dependent.
It therefore highlights that where there is a current or future risk of US secondary sanctions (or indeed any other sanctions risks) parties should ensure agreements are carefully drafted to protect their interests by including specifically tailored sanctions clauses.
Bespoke clauses can allow the parties to specifically address the unusual risks of extraterritorial sanctions and to have a clear contractual allocation of these risks, rather than having to rely purely on a standard compliance with laws clause, and the risk of the counterparty disagreeing with their interpretation of that clause.
This article was authored by Fieldfisher dispute resolution partner, Vivien Davies; senior associate Vanessa Wilkinson; and solicitor Suzanne Loding. For more information about the impact of US extra-territorial sanctions and other sanctions regimes, please contact a member of Fieldfisher's sanctions and export control team.

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