In two judgments in the last year, the English High Court has examined sanctions clauses in detail. Each case involved a refusal by parties to pay under an agreement, citing risks under US extraterritorial (“secondary”) sanctions. The Court’s judgments in these cases raise a number of issues for the drafting of sanctions clauses, and highlight the need to consider carefully the scope of the contract and the impacts that US sanctions may have upon its performance.
Mamancochet Mining Limited v Aegis Managing Agency Limited  EWHC 2643 (Comm)
In this case, Mamancochet, the assignee of a marine cargo insurance policy, sued the various defendants for their refusal to pay an insurance claim related to goods stolen from bonded storage in Iran. The claim was issued in May 2018, following President Trump’s announcement that the US was reimposing secondary sanctions with respect to Iran.
The defendants, a group of UK insurers ultimately owned or controlled by US persons, had sought to rely upon a standard sanctions clause that enabled them to refuse payment “to the extent that [payment] would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.”
At the time that the claim was issued, a wind-down period was in effect that permitted certain activities related to Iranian-related business. It was common ground that the repayment would be prohibited under US sanctions once the wind-down period ended. The key question for the Court was therefore whether the sanctions clause prohibited repayment during the wind-down period.
The Court held that:
- The defendants would not be liable to pay where payment would be prohibited under one of the legal frameworks named in the clause, and thereby “would expose” the defendants to a sanction (i.e., a penalty). The clause did not extend to cases where there was a risk that an authority might impose a sanction, as it did not contain wording such as “exposure to the risk of being sanctioned”.
- The wind-down period permitted payment of the insurance claim, as it was broadly drafted and intend to apply “to operations that were consistent with the lifting of sanctions under the JCPOA”. Payment was not otherwise prohibited by EU sanctions.
- The sanctions clause did not extinguish the defendants’ liability, but only suspended it, as the clause allowed the defendants to refuse payment “to the extent” that payment would be prohibited under sanctions. If and when the sanctions were lifted, then the obligation to pay would resume.
- It was not necessary to rule on the application of the EU Blocking Regulation, as US sanctions did not prohibit payment of the claim (at least during the wind-down period; the Court did not rule on the defendants’ liability to pay following expiry of the wind-down period). However, the Court did note that is saw “considerable force” in an argument advanced by the defendants that an obligation to pay that is suspended by a sanctions clause in a contract would not breach the Blocking Regulation (which prohibits compliance with US sanctions against Iran).
Lamesa Investments Ltd v Cynergy Bank Ltd  EWHC 1877 (Comm)
In this case, Lamesa, a Cypriot company ultimately owned by a Russian individual, lent £30m to Cynergy Bank, a UK bank, pursuant to an English law facility agreement. The facility agreement contained the following clause:
In the event that any principal or interest in respect of the … loan has not been paid within 14 days from the due date for payment and such sum has not been duly paid within a further 14 days following written notice from [Lamesa] to [Cynergy] requiring the non-payment to be made good, [Lamesa] may institute proceedings in a court of competent jurisdiction in England for the winding up of [Cynergy] … provided that [Cynergy] shall not be in default if during the 14 days after [Lamesa’s] notice is satisfies [Cynergy] that such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction. Where there is doubt as to the validity or applicability of any such law, regulation or order, [Cynergy] will not be in default if it acts on the advice given to it during such 14 day period by its independent legal advisers. [emphasis added]
After Lamesa had lent the funds to Cynergy, Lamesa’s Russian owner became designated under US sanctions. The designation additionally entitled the US Government to impose secondary sanctions on any foreign financial institutions that “knowingly facilitated a significant financial transaction on behalf of” the Russian owner. As a result, Cynergy refused to make interest payments to Lamesa, relying on the sanctions clause and the secondary sanctions risk as a result of the designation. Lamesa disagreed, and sued for the unpaid interest.
It was common ground between the parties that the transaction was not blocked by US primary sanctions. Therefore, the key question was the threat of secondary sanctions alone was enough to justify non-payment “in order to comply with any mandatory provision of law.”
Cynergy argued in defence that the secondary sanctions were a “mandatory provision of law”, as they imposed an implied obligation not to knowingly facilitate a significant transaction on behalf of an SDN. The payment of interest was at least arguable as a significant financial transaction, and there was no realistic prospect of Cynergy obtaining a waiver from the US Government. Therefore, there was a realistic risk of secondary sanctions being imposed against Cynergy if it made the payment, and so it was entitled to rely on the clause in order to avoid this risk.
Lamesa argued that the secondary sanctions were not a “mandatory provision of law”, as there was no express prohibition on making the payment – Cynergy was instead not paying in order to avoid a possibility that secondary sanctions might be imposed by the US. In other words, it was not a requirement of US law for Cynergy to not make the payment. Lamesa also argued that a “mandatory provision of law” referred to “a law applying to UK parties, acting in the UK, that have agreed to make a sterling payment pursuant to a contract governed by English law”, and not to foreign laws, including US laws.
The High Court held the following:
- There was no territorial qualification either made or intended for the clause, in particular noting the reference to “any court of competent jurisdiction”.
- A “mandatory provision of law” was (and was understood by the parties to mean) a provision of law that the parties could not vary or disapply (e.g., by explicitly contracting out). As it was not possible for the parties to vary or disapply the US sanctions, they constituted mandatory law.
- The phrase “in order to comply with any mandatory provision of law” permitted Cynergy to act or refrain from acting “in a manner that would otherwise attract the possible imposition of a sanction or penalty by operation of statute.” This was largely because (i) the US secondary sanctions constituted an implied prohibition as they involved the imposition of a penalty; (ii) the intention of the clause was to protect Cynergy before it made a payment that might attract a penalty (and not after); and (iii) the US policy position that was secondary sanctions would generally apply in all cases (with only limited possibility of waiver).
- There was no mandatory rule that prevented the court from giving effect to US extraterritorial sanctions in this way. The EU Blocking Regulation did not apply to US sanctions against Russia, and there was no rule preventing the parties from expressly agreeing that a foreign law may excuse them from performing (which, in the court’s view, they had).
What do these judgments mean for sanctions clauses?
These two cases indicate that the English courts will continue to take a close interest in the precise wording of any sanctions clause, or a more general compliance with laws clause, in cases where a party is seeking to rely on foreign sanctions to justify failing to perform under a contract. In both cases, the Court’s analysis hinged upon a close reading of the clauses at issue.
It is also clear that the Court will consider the substance of foreign sanctions in detail, and may even reach its own conclusions as to their application. In Mamancochet v Aegis, the Court heard evidence from two US sanctions experts and reached a conclusion as to the scope of US sanctions waivers, in order to determine whether payment was prohibited by US sanctions. However, it is also clear that the Court is willing to interpret foreign sanctions widely, as shown by the fact that the mere risk of secondary sanctions being imposed on Cynergy was deemed sufficient to justify its non-payment.
These cases underline the importance of ensuring that sanctions clauses and compliance with law clauses are suited to the particular risks that may affect performance of the contract. In particular, businesses should consider the following key questions, taking into account whether they are primarily seeking to benefit from the protection of a sanctions clause, or will be accepting the burden of compliance with the clause:
- Is there a potential risk of sanctions affecting the contract, either now or in the foreseeable future? This may take the form of the counterparty becoming designated, or of more general sanctions such as sectoral or country-wide restrictions affecting performance. Consider also whether the risk might take the form of primary sanctions (e.g., because one party has a US nexus), or only secondary sanctions, and consider whether to limit the clause appropriately.
- Is a general compliance with laws clause sufficient to cover potential sanctions risk? It may be worth considering a standalone sanctions clause, in order to ensure that the scope of relevant sanctions is clearly defined in the contract, and to avoid the risk of an expansive interpretation resulting from the use of a general clause.
- Should particular jurisdictions’ sanctions be specifically called out in the clause? An exhaustive list of relevant sanctions regimes may help to provide certainty, and bolster a claim that only the named foreign sanctions should be taken into account in the event of any litigation. On the other hand, a failure to mention any relevant jurisdiction means that the Court may view a clause as referring to all foreign sanctions, including those with extraterritorial effect.
We expect sanctions clauses to come under further and more sustained scrutiny from the courts, in light of the US’ increased focus on sanctions as a diplomatic tool, the UK’s increased enforcement in this area, and increasing awareness amongst European businesses of the EU Blocking Regulation. It is therefore ever more vital that sanctions clauses are drafted carefully and appropriately, taking into account the risk profile of the contract in question.