• Home »
  • Commentary »
  • Banking litigation offers appellate insight on sanctions compliance

28 July 2020

Banking litigation offers appellate insight on sanctions compliance

Suzanne Rab, of Serle Court, discusses a recent Court of Appeal decision concerning US sanctions and English law contracts

Suzanne Rab, Serle Court Chambers

The Court of Appeal has ruled in the case of Lamesa Investments Ltd v Cynergy Bank, a dispute that has significance for financial institutions managing satisfactory compliance with sanctions, in this instance US sanctions.

The appeal concerned the interpretation of a facility agreement between the lender Lamesa Investments and UK-based Cynergy Bank.

While departing from some of the reasoning of the High Court in its 2019 judgment, the Court of Appeal dismissed the appeal and agreed that Cynergy had the right to refuse to pay interest to Lamesa where the payment was likely to result in the imposition of US secondary sanctions on Cynergy.

The appeal concerned the meaning of a provision in the facility agreement providing that Cynergy was not required to make any payment where “such sums were not paid in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction” (clause 9.1).

The court confirmed that Cynergy could rely on the clause as a carve-out to a non-payment event of default while Lamesa’s owner was a blocked person under US secondary sanctions law. 

This was so even though the US law did not directly prevent the borrower from paying amounts to a blocked person, it created a risk to that effect if it made the payment (for instance, by being unable to maintain a correspondent US bank account which was required for its US business).

The Court of Appeal ruling

In reaching this conclusion the court made a number of significant findings. First, such a clause was standard in facility agreements for Tier 2 lending to an international bank. There should be less focus on the factual background and more weight accorded to the words used.  

Second, the proviso to the clause was ambiguous, meaning it was necessary to consider the relevant context and to apply commercial sense. It was a standard provision in an agreement providing Tier 2 capital to an international bank but was not standard in ordinary facility agreements. The EU Blocking Regulation must have been known to the parties and whoever drafted the clause.

The court found that the draftsperson must be taken to know that the EU Blocking Regulation, using similar language to the clause in question, considers US secondary sanctions as imposing a “requirement or prohibition” with which EU parties are required to comply.  

At the time, secondary US sanctions would have been one of the potential issues affecting parties to agreements for the provision of Tier 2 capital.  

The clause was obviously drafted to address possible future scenarios that extended beyond general sanctions. Arguably the High Court interpreted the clause to cover prospective US sanctions affecting only the lender.

Third, clause 9.1 did not extinguish the payment obligation but had the consequence that Cynergy was not in default. Its obligation to pay was deferred, albeit potentially for some time.

Fourth, the words “in order to comply with any mandatory provision of law” had two possible meanings. They could be construed as meaning the borrower complying with the law that is binding on it which directly requires it to pay the relevant sums, or the borrower complying with an actual or implied prohibition.  

Departing from the High Court’s reasoning, a “mandatory provision” for the purposes of clause 9.1 did not mean a provision from which the parties could not derogate. It simply meant a mandatory provision that requires a party to do or refrain from doing a specific act.

Finally, it was not certain if the borrower made a payment to the lender that it would be sanctioned.  What mattered more was the borrower’s reason for non-payment, not whether it was certain or only likely to be sanctioned if it made payment.  

Overall, the balance of interest—in the lender being paid on time and the borrower deferring payment if payment would likely be unlawful under any law which would affect its ability to operate its business—favoured the interpretation of the clause as covering US secondary sanctions law.

It has to be noted that the judgment was not free from some doubt. While ultimately not dissenting, Lord Justice Arnold expressed reservations about the finding in respect of the wording “in order to comply with”, picking up arguments from Lamesa that clearer words would be required to excuse a payment obligation.

Conclusion

The case underscores the importance of clarity in drafting of sanctions clauses and the risk of different interpretations. Even where a standard-form clause is in issue, a number of factors will be weighed.  

Given the Court of Appeal’s approach, parties engaged in business in countries that are subject to extraterritorial sanctions regimes will want to review their sanctions and compliance with law clauses to satisfy themselves that these will function as they are intended.  

Depending on the facts, standard-form clauses may not always be fit-for-purpose. A tailored clause can take account of the specific risks, including those presented by secondary sanctions with long-arm reach.

Full citation: Lamesa Investments Ltd v Cynergy Bank [2020] EWCA Civ. 281.

Counsel: Jonathan Crow QC of 4 Stone Buildings, Maya Lester QC of Brick Court Chambers and Henry Moore of 7 King’s Bench Walk (instructed by Elborne Mitchell) appeared for the appellant.

Dinah Rose QC, Brian Kennelly QC and Jason Pobjoy (all Blackstone Chambers) (instructed by Sidley Austin) appeared for the respondent.

Suzanne Rab is a barrister at Serle Court Chambers specialising in regulation, EU law and international trade law matters including sanctions law. She is a professor at Brunel University. 

Email your news and story ideas to: news@globallegalpost.com