Non-US financial institutions may address risks of secondary sanctions in contracts

In the recent English case of Lamesa Investments v Cynergy Bank [2020] EWCA Civ 821, the Court of Appeal (“CA”) affirmed the High Court (“HC”)’s ruling that non-US financial institution borrower Cynergy’s (a) refusal to pay Lamesa did not constitute a default where the ultimate beneficial owner of Lamesa remained a blocked person under US sanctions law based on a clause in the facility agreement that Cynergy would not be at fault if a sum was not paid “in order to comply with any mandatory provision of law”.

After the HC ruled that “mandatory” meant a law that the parties could not vary or disapply contractually, Lamesa appealed contending the US sanctions legislation contained no express legal prohibition on payment, so Cynergy could not say it refused to pay in order to comply with a mandatory provision of law.

In deciding that the Borrower’s non-payment was within the scope of the proviso to the relevant clause and did not constitute a payment default under the facility agreement, the CA held that:

• (Disagreeing with the HC) “mandatory” simply meant compulsory or required, on the basis that the EU blocking regulation applicable to the parties (being EU institutions) used the terms “requirement or prohibition”. Therefore, a mandatory provision was interpreted as one that required a person to do or to refrain from doing a specified act. In the circumstances of the case, whilst it was not certain that Cynergy would be sanctioned for making a payment, what mattered was Cynergy’s reason for non-payment.
• As drafters should have known that the EU blocking regulation regarded US secondary sanctions legislation as imposing a “requirement or prohibition” with which EU parties had to “comply”, the drafters of the relevant clause must have intended that Cynergy be capable of obtaining relief from default if its reason for non-payment was to “comply” with a foreign statute (including US secondary sanctions) that would otherwise be triggered.
• If a “mandatory provision of law” only referred to one that directly bound Cynergy not to pay, the relevant clause would have had almost no possibility of taking effect.
• The reasoning above reflected the court’s adoption of the contractual interpretation principle that the context of the relevant contract and business common sense or commercial purpose of the contract or provision should generally be considered. This judgment provides useful guidance to non-US financial institutions enabling them to address the risk of secondary sanctions in their contracts by including an appropriate “mandatory provision of law” proviso, even though payment to a blocked person may not be directly prohibited but merely creates a risk of sanction.