High Court ruling acknowledges the extraterritorial effect of US secondary sanctions.

In the recent case of Lamesa Investments Ltd v. Cynergy Bank Ltd [2019] EWHC 1877 (Comm), the High Court found that US secondary sanctions constituted a “mandatory provision of law” excusing non-payment under a Facility Agreement.

Facts

Lamesa is a Cypriot company indirectly owned by Mr. Viktor Vekselberg, a Ukrainian individual. In December 2017, Cynergy (an English bank) entered into a Facility Agreement with Lamesa, under which Lamesa lent Cynergy £30 million and Cynergy was obliged to make interest payments every six months. The Facility Agreement was governed by English law.

At the time the parties entered into the Facility Agreement, Cynergy was aware that it was possible that US sanctions would be imposed on Lamesa. Three months later, OFAC added Mr. Vekselberg to the list of Specially Designated Nationals and, consequently, Lamesa became a Blocked Person for purposes of US sanctions.

As a result, Cynergy was at risk of having secondary sanctions imposed on it by the US government under the Ukraine Freedom Support Act 2014, if it made payments to Lamesa. This would have been “ruinous” for Cynergy, so the bank stopped doing so.

Lamesa subsequently sued for a declaration that Cynergy was obliged make repayments to the company. In response, Cynergy sought to rely on clause 9.1 of the Facility Agreement, which provided that it was not in breach if:

“… sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”.

“Regulation” was defined in the Agreement as including “any regulation, rule, official directive, request or guideline … of any governmental, intergovernmental, or supranational body, agency, department or of any regulatory, self-regulatory or other authority or organisation”.

Lamesa argued that Cynergy could not rely on clause 9.1 because:

  • provision of law” meant a law that applied to a UK entity, acting in the UK, that had agreed to make a sterling payment pursuant to a contract governed by English law; and
  • mandatory” meant that the relevant law made it compulsory for Cynergy to refuse payment.

The Court’s Decision

The Court found that construing the reference to ‘mandatory provision of law’ as being confined to English law would be inconsistent with the absence of any territorial qualification from the definition of the word ‘regulation’.

The Court took the view that there were three possible permutations in which the phrase “in order to comply” could apply:

  • Only in relation to a statute that expressly prohibited payment on pain of the imposition of a sanction of penalty
  • Whenever a party either acted or refrained from acting in a manner that would otherwise attract a sanction or penalty imposed by statute
  • Whenever a party either acted or refrained from acting in a manner that would otherwise attract the possible imposition of a sanction or penalty by operation of statute

In determining which of these possibilities was intended to apply, it was necessary to consider the context in which the phrase was used. The Court found that there was nothing in the language used by the parties that confined the scope of clause 9.1 to the first permutation, or to the first and second permutations but not the third. On the contrary, the factual and commercial context suggested that it was highly unlikely that the parties intended to confine its scope in this way. Since the only risk to which Cynergy was exposed was of becoming subject to secondary sanctions, the Court considered that it was improbable that the parties could have intended the scope of clause 9.1 to be limited to protecting Cynergy from the risk it was not exposed to and not to extend to the risk that was apparent.

Cynergy was therefore entitled to rely on clause 9.1 for as long as Mr. Vekselberg remained a Specially Designated National and Lamesa remained a Blocked Person.

Conclusion

The case is of particular interest since it acknowledges the extraterritorial effect of US secondary sanctions. The Court’s conclusion that the risk to a non-US person of designation under US secondary sanctions could excuse non-performance under a contract governed by a non-US law is significant. Non-US parties to English law-governed contracts that excuse contractual performance in order to comply with “any mandatory provision of law” should consequently be aware that this provision may be extended to encompass US secondary sanctions, and is not limited to applicable EU / UK sanctions.