The Court of Appeal decision, which considered standard form wording and the “mandatory” nature of US sanctions laws, upholds a High Court ruling exempting a borrower’s non-payment of interest, albeit on different grounds.
By Charles Claypoole, Nell Perks, Robert Price and Thomas Lane
In the recent case of Lamesa Investments Limited v. Cynergy Bank Limited  EWCA Civ 821, the Court of Appeal upheld — albeit on different grounds — a High Court decision (described here) that US secondary sanctions constituted a “mandatory provision of law”, and that the borrower’s compliance with these sanctions excused its default on payment obligations under a facility agreement.
Lamesa was a Cypriot company indirectly owned by the Russian national, Mr. Viktor Vekselberg. On 19 December 2017, Lamesa concluded an English law-governed facility agreement with the English retail bank, Cynergy. Under that facility agreement, Lamesa loaned Cynergy £30 million for a term of 10 years, with interest payable at half yearly intervals. At the time of the High Court hearing in 2019, that interest already totalled £3.6 million.
Roughly three-and-a-half months after the date of the facility agreement, the US Treasury’s Office of Foreign Assets Control (OFAC) placed Mr. Vekselberg on its list of “Specially Designated Nationals” (SDNs) and “Blocked Persons”, which are the target of US sanctions and with which most business dealings are prohibited. Lamesa, by virtue of Mr. Vekselberg’s indirect ownership, accordingly also became an SDN or Blocked Person by operation of law for the purposes of US sanctions.
US sanctions permit the imposition of so-called “secondary sanctions”. Secondary sanctions target persons which do business with SDNs or Blocked Persons, but which are not strictly subject to US jurisdiction (for instance, because they are non-US persons involved in transactions without a US nexus). These secondary sanctions take the form of the US denying the targeted non-US person certain trading privileges relating to the United States. These measures can include preventing the targeted person using correspondent US Dollar accounts with US financial institutions. In some extreme cases, the targeted person doing business with an SDN can be designated as an SDN itself. Cynergy argued that as it maintained US Dollar accounts with US banks, its potential targeting under US secondary sanctions was a serious risk to its business.
The facility agreement contained wording exempting Cynergy from the consequences of defaulting on interest payments if its reason for doing so was:
“…in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction.”
The “mandatory provision of law” that Cynergy cited was the US Ukraine Freedom Support Act (UFSA). With only limited exceptions, UFSA directs the US President to impose secondary sanctions on non-US persons who “knowingly facilitated a significant financial transaction” on behalf of an SDN or Blocked Person.
In the High Court, Lamesa had essentially argued that Cynergy’s non-payment was a decision stemming from mere commercial risk rather than from complying with a “mandatory provision of law” — not least since UFSA was not a law with which Lamesa was bound to comply as a jurisdictional matter in repaying the loan. The High Court disagreed. The judge held that a “mandatory provision of law” was essentially one that the parties could not vary, as opposed to one with which the parties were bound to comply. The judge reasoned that parties were free to include contractual provisions requiring compliance with different laws regardless of their jurisdictional scope. In other words, even if Lamesa was able to repay the loan to Cynergy without breaching a law with which it was required (as a jurisdictional matter) to comply, the fact that it would be putting itself at risk under US secondary sanctions was sufficient to trigger the exemption. The judge noted the “absence of any territorial qualification” in the exemption’s wording or in the facility agreement’s definitions of the words that exemption used. The judge further reasoned that the parties’ lawyers would have intended to negotiate a clause aimed at capturing realistic commercial risks such as those secondary sanctions risks that would arise from Mr. Vekselberg becoming an SDN.
The Court of Appeal’s Decision
Lamesa’s appeal focused on two main grounds.
First, Lamesa argued that the exemption’s wording was not in fact specifically negotiated, but simply replicated standard form wording used in many facility agreements.
Second, Lamesa argued that UFSA’s sanctions did not constitute a “mandatory provision of law” as they did not constitute an “express legal prohibition on payment”. The key provision of UFSA is phrased as follows:
“The President shall impose, unless the President determines that it is not in the national interest of the United States to do so, [secondary sanctions on] a foreign financial institution if the President determines that the foreign financial institution has […] knowingly facilitated a significant financial transaction on behalf of any [SDN or Blocked Person].”
The Court of Appeal first considered the interpretation of the standard form exemption provision: i.e., that no default would occur if the non-payment was “in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction”.
The Court of Appeal accepted evidence that the exemption’s wording was a standard term in facility agreements. It accordingly considered the intentions of that wording’s drafter, whom it recognised must have intended it to be sufficiently dynamic to deal with a variety of “possible future events”, some of which (such as secondary sanctions) may have been undeveloped in practice but nonetheless perceptible to the financial industry.
The Court of Appeal considered that certain “context and commercial common sense” was admissible for the purpose of understanding the drafter’s intent. One such piece of context was the wording of the EU Blocking Regulation (Council Regulation (EC) No. 2271/66). The Blocking Regulation directs that:
“No [EU person] shall comply, whether directly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the Annex or from actions based thereon or resulting therefrom.”
The laws specified in the Blocking Regulation’s Annex do not include UFSA but do include other pieces of US legislation that are used to impose secondary sanctions.
The Court of Appeal considered that there were textual similarities between the Blocking Regulation and the wording of the standard form exemption. The Blocking Regulation described US secondary sanctions legislation as imposing a “requirement or prohibition” with which EU parties were otherwise required to “comply”. The Court of Appeal saw similarities between that and the wording of the standard form exemption, which concerned “mandatory” laws or regulations of unspecified jurisdictions with which a party had to “comply”. It concluded the drafter must have intended the borrower to be capable of obtaining relief from default if the borrower’s reason for non-payment was to “comply” with such a foreign “requirement or prohibition”.
The Court of Appeal accordingly concluded that, notwithstanding UFSA’s precise phraseology, the US legislation “must be” seen “as an effective prohibition”. The Court of Appeal also considered it important that the exemption did not “abrogate” the payment entirely, but merely abrogated the default stemming from not making the payment at a certain date.
Accordingly, the Court of Appeal rejected Lamesa’s appeal and upheld the High Court ruling.
The Court of Appeal’s identification of the language in the facility agreement as standard form wording indicates that this reasoning may be applied to similar contractual disputes involving similar wording. Accordingly, contract language that specifies that non-performance shall not constitute a default under the contract if such non-performance was “in order to comply with any mandatory provision of law” would extend to non-performance by a non-US person in order to ensure compliance with US secondary sanctions.
It is also significant that the Court of Appeal reached its decision by scrutinising the EU Blocking Regulation and concluded that the statute in effect recognises US sanctions as a mandatory provision of law — even for non-US persons.
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